Banks must be prepared to provide federal regulators with increased disclosures on their commercial real estate portfolios, including to an unlikely entrant.
The US SEC is increasingly probing public US banks with high commercial real estate (CRE) concentrations. While the three main federal bank regulators are also more closely scrutinizing banks' CRE books to look for safety and soundness concerns, the SEC too has joined in asking banks for more information on industry and geographic breakdowns, average loan-to-value ratios, ranges of loan-to-value ratios, occupancy percentages, loan modifications, frequency and sources of appraisals, and risk management, industry advisers said.
The SEC declined to answer questions for this story. However, the agency recently acknowledged that it is considering how banks are disclosing various aspects of CRE and encouraging companies to consider where they can provide more granular disclosures, Erik Gerding, director of the SEC's Division of Corporation Finance, said in a statement at a conference in June.
Increasing information requests
In April, both Independent Bank Group Inc. and New York Community Bancorp Inc. received letters from the SEC asking for additional details on their CRE books. The New York Community request came after the bank's multifamily book was scrutinized following its fourth-quarter 2023 results.
Prior to that, Western Alliance Bancorp. received a letter from the SEC related to its CRE book in January, along with at least four other community banks: MainStreet Bancshares Inc., Alerus Financial Corp., Mid Penn Bancorp Inc. and Ohio Valley Banc Corp.
But these requests from the SEC have been going on for at least a year, and the agency will keep knocking on more banks' doors asking for increased CRE disclosures, several bank advisers told S&P Global Market Intelligence. Banks with higher CRE concentrations than normal for the industry will be the target of these requests, they said.
"If there are any banks with similar percentage of CRE investments, then they may get a letter, or there may be some scrutiny, or the SEC may be looking into them," said Adrienne Gurley, financial services partner at Venable LLP.
In late 2023, the SEC sent out at least a dozen letters asking for "additional granularity on CRE, particularly breakdowns by industry," said Kevin Strachan, partner advising financial institutions at Fenimore Kay Harrison LLP. A couple of his clients received "future filings requests" and made changes in their Forms 10-K.
Subsequently, in the past month or two, "there's been another flurry of similar comment letters" regarding Forms 10-K filed for the period ended Dec. 31, 2023, Strachan said.
Why the SEC is stepping in
It is unclear why the SEC has begun probing banks' CRE books, especially since the agency does not have authority to demand banks' change their lending behavior like the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve do. Several advisers believe the agency is looking out for investors.
"It's got to be spelled out," Luis Salazar, partner at Salazar Law LLP, said in an interview. "It's got to be expressed so that investors can understand what they're getting into or what they're, say, staying with if they continue with the investments."
It is also possible the three federal banking agencies asked the SEC to get involved.
"We don't know what's driving it," Strachan said in an interview. "We don't know if this is something internal with the SEC, if they just decided ... 'Banks are kind of being in the news right now, so we should give them a little more scrutiny, in particular around CRE,' or if this was something that could've even been suggested by some of the other regulators."
Another possibility is the SEC could be seeking more information in response to the Financial Stability Oversight Council's annual report, Salazar said. In the Financial Stability Oversight Council's latest report from December 2023, the agency tabbed CRE as a vulnerability for banks.