It's time to revamp the call report's archaic handling of CRE loans

Jeenah Moon/Bloomberg

Despite the heightened focus on risks associated with commercial real estate lending, the quarterly call report filed with bank supervisory agencies has not evolved to provide banks and regulators with the necessary information to assess the financial health and risk profile of institutions with CRE lending concentrations. It is time to change this for the benefit of all stakeholders, especially banks and their regulators.

While multifamily properties have traditionally been broken out into their own category, the call report did not separate owner-occupied CRE from non-owner-occupied CRE until 2008. This change was significant because the financial viability of an owner-occupied property depends on the health of the underlying business, whether it be a manufacturing company, law firm or technology business. Non-owner-occupied CRE, on the other hand, relies heavily on the property's ability to generate rental income.

However, not all rental income is equal. For example, an empty office tower in downtown Washington poses different risks than a thriving strip mall in the suburbs of Leesburg, Virginia. It is lazy at best and misleading at worst to group non-owner-occupied CRE into a single category. Office properties are currently experiencing a structural shift due to the work-from-home trend, while strip malls which typically are located in nonurban areas are benefiting from it. The underwriting and risks associated with lending to these two segments of the CRE market are very different.

Similarly, a half-empty shopping mall and a fully occupied industrial warehouse have undergone structural changes due to the rise of online shopping, but in opposite directions. By expanding the call report to require banks to break down their non-owner-occupied CRE loans by property type, regulators can efficiently assess banks based on concentration risk. Banks with diversified portfolios or concentrations in property types experiencing strong structural trends, such as strip malls or warehouses, can better communicate their risk profile to regulators, investors, insurance underwriters and the media.

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While some banks may resist such a change, viewing the call report as burdensome red tape, expanding it to require banks to break down their CRE loans by property type could be limited to banks with CRE concentrations greater than 300% of capital and with over $1 billion in assets. Most banks meeting this definition should welcome this change, as an inability to easily break out their CRE loans by property type should raise a red flag in itself.

Publicly traded banks recognize the importance of this distinction, often including a breakdown of their CRE portfolio by property type in their investor presentations. Lumping CRE loans into one broad category is archaic, especially in a digital, data-driven world. The call report is more than just a form; it's a sorting and screening system. It's time to update that system for a critical component that hasn't been touched in over 15 years.