More Bank Failures Expected in 2024/2025

Small banks can take several proactive measures to mitigate the impact of commercial real estate (CRE) exposure. While there is no one-size-fits-all solution, here are some strategies that can help:

1. Review Portfolios:
   • Regularly review the concentration of loans in CRE by category (e.g., office buildings, retail centers, multifamily properties).
   • Break down exposures by maturity and refinancing risk.
   • Consider stress testing for both near-term and long-term refinancing.
2. Set Guidelines:
   • Establish clear guidelines for CRE lending.
   • Define acceptable risk levels based on the bank’s risk appetite.
   • Monitor adherence to these guidelines.
3. Understand Current Valuations:
   • Stay informed about CRE market trends, including property values, rental rates, and supply-demand dynamics.
   • Regularly assess the valuation of CRE assets in the bank’s portfolio.
4. Enhance Risk Management:
   • Identify potential pockets of risk within the CRE portfolio.
   • Reexamine geographic, property, obligor, and other concentrations.
   • Adjust risk management practices to align with long-term risk objectives.
5. Maintain Liquidity:
   • Ensure sufficient liquidity to weather any downturns in the CRE market.
   • Be prepared for potential refinancing challenges.
6. Communicate with Borrowers:
   • Establish open communication with borrowers.
   • Work through financing challenges sooner rather than later.
   • Understand their specific needs and circumstances.
7. Diversify Loan Portfolios:
   • Balance CRE loans with other types of loans (e.g., residential mortgages, consumer loans).
   • Diversification helps mitigate concentration risk.
8. Monitor Market Conditions:
   • Stay informed about economic indicators, interest rates, and industry-specific developments.
   • Adjust lending practices based on changing market conditions.

Each bank’s situation is unique, and risk mitigation strategies should be tailored to their specific circumstances. Regular monitoring, stress testing, and proactive risk management are essential for small banks facing CRE exposure.