Introduction

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While the banking industry is widely viewed as more resilient today than it was heading into the financial crisis of 2007–2009, ^{The November 2022 Financial Stability Report released by the Board of Governors highlighted several key actions taken by the Federal Reserve following the 2007–2009 financial crisis that have promoted the resilience of financial institutions. This report is available at www.federalreserve.gov/publications/files/financial-stability-report-20221104.pdf + Show More}  the commercial real estate (CRE) landscape has changed significantly since the onset of the COVID-19 pandemic. This new landscape, one characterized by a higher interest rate environment and hybrid work, will influence CRE market conditions. Given that community and regional banks tend to have higher CRE concentrations than large firms (Figure 1), smaller banks should stay abreast of current trends, emerging risk factors, and opportunities to modernize CRE concentration risk management. ^{See Kyle Binder, Emily Greenwald, Sam Schulhofer-Wohl, and Alejandro H. Drexler, “Bank Exposure to Commercial Real Estate and the COVID-19 Pandemic,” Federal Reserve Bank of Chicago, 2021, available at www.chicagofed.org/publications/chicago-fed-letter/2021/463 + Show More} , ^{The November 2022 Supervision and Regulation Report released by the Board of Governors defines concentrations as follows: “A bank is considered concentrated if its construction and land development loans to tier 1 capital plus reserves is greater than or equal to 100 percent or if its total CRE loans (including owner-occupied loans) to tier 1 capital plus reserves is greater than or equal to 300 percent.” Note that this method of measurement is more conservative than what is outlined in Supervision and Regulation (SR) letter 07-1, “Interagency Guidance on Concentrations in Commercial Real Estate,” because it includes owner-occupied loans and does not consider the 50 percent growth rate during the prior 36 months. SR letter 07-1 is available at www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm, and the November 2022 Supervision and Regulation Report is available at www.federalreserve.gov/publications/files/202211-supervision-and-regulation-report.pdf. + Show More}

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Conclusion