PRESS RELEASE
Federal Deposit Insurance Corporation
November 14, 2000 Media Contact:
Rosemary George (202) 898-6530
Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's
banking system. It promotes the safety and soundness of these institutions by identifying, monitoring and addressing
risks to which they are exposed. The FDIC receives no federal tax dollars — insured financial institutions fund its
operations.
FDIC press releases and other information are available on the Internet at www.fdic.gov, by subscription electronically
(go to www.fdic.gov/about/subscriptions/index.html) and may also be obtained through the FDIC's Public Information
Center (877-275-3342 or 703-562-2200). PR-80-2000
FDIC CHAIRMAN WARNS RISK MANAGERS TO WATCH MARKETS,
PARTICULARLY COMMERCIAL REAL ESTATE,
VULNERABLE IN CASE OF ECONOMIC DOWNTURN
FOR IMMEDIATE RELEASE
Rising risk levels in booming markets that are vulnerable to an economic downturn,
particularly commercial real estate, are of growing concern, FDIC Chairman Donna
Tanoue said Tuesday in a speech to the Risk Management Association in Nashville.
Some of the most worrisome trends include an increased level of problem loans
identified in the Shared National Credit Review, increased corporate leverage,
increases in default rates, and the development of certain portfolio characteristics in
some banks that leave them vulnerable to potential softening in the local real estate
markets, Chairman Tanoue said.
Using an on-site model called the Real Estate Stress Test or REST, the FDIC has
calculated scores for the banking industry as a whole from 1987 to the present and has
"seen a significant deterioration in scores since 1995," Chairman Tanoue said.
"Between 1987 and 1995, a period that included the New England and Southern
California [real estate] crises, the percentage of very vulnerable institutions per the
REST model never exceeded 5 percent of the industry," she said.
"But by December 1999 that percentage had increased to 8 percent of the industry. It
now exceeds 9 percent of the industry," Chairman Tanoue said.
She also said that an additional 16 percent of the industry is identified as somewhat
vulnerable to a downturn.
Federal Deposit Insurance Corporation
November 14, 2000 Media Contact:
Rosemary George (202) 898-6530
Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's
banking system. It promotes the safety and soundness of these institutions by identifying, monitoring and addressing
risks to which they are exposed. The FDIC receives no federal tax dollars — insured financial institutions fund its
operations.
FDIC press releases and other information are available on the Internet at www.fdic.gov, by subscription electronically
(go to www.fdic.gov/about/subscriptions/index.html) and may also be obtained through the FDIC's Public Information
Center (877-275-3342 or 703-562-2200). PR-80-2000
FDIC CHAIRMAN WARNS RISK MANAGERS TO WATCH MARKETS,
PARTICULARLY COMMERCIAL REAL ESTATE,
VULNERABLE IN CASE OF ECONOMIC DOWNTURN
FOR IMMEDIATE RELEASE
Rising risk levels in booming markets that are vulnerable to an economic downturn,
particularly commercial real estate, are of growing concern, FDIC Chairman Donna
Tanoue said Tuesday in a speech to the Risk Management Association in Nashville.
Some of the most worrisome trends include an increased level of problem loans
identified in the Shared National Credit Review, increased corporate leverage,
increases in default rates, and the development of certain portfolio characteristics in
some banks that leave them vulnerable to potential softening in the local real estate
markets, Chairman Tanoue said.
Using an on-site model called the Real Estate Stress Test or REST, the FDIC has
calculated scores for the banking industry as a whole from 1987 to the present and has
"seen a significant deterioration in scores since 1995," Chairman Tanoue said.
"Between 1987 and 1995, a period that included the New England and Southern
California [real estate] crises, the percentage of very vulnerable institutions per the
REST model never exceeded 5 percent of the industry," she said.
"But by December 1999 that percentage had increased to 8 percent of the industry. It
now exceeds 9 percent of the industry," Chairman Tanoue said.
She also said that an additional 16 percent of the industry is identified as somewhat
vulnerable to a downturn.
"Combine the two figures," Chairman Tanoue said, "and one fourth of the industry is
potentially affected."
Chairman Tanoue stressed: "Effective risk management is the bank manager's most
important bulwark against credit loss and bank failure. This is true not only in bad times,
but in the best of times."
Likening the FDIC to a kind of economic weatherman, Chairman Tanoue said that the
agency had recently "pointed out that a number of cities nationwide are at risk for
overbuilding commercial real estate. This does not necessarily mean that these cities
are headed inevitably for the kind of real estate crisis we experienced in the late 1980s
and early 1990s."
She noted that a tornado watch does not mean that severe weather is inevitable, but
that "conditions exist for the development of a tornado and that one needs to keep up to
date on the latest weather information."
"I too hope that the economic expansion will continue unabated and that local real
estate markets remain healthy and stable," Chairman Tanoue told the risk managers.
"However, as you know, hope is not a risk mitigation technique."
"All of us – regulators, risk managers, and developers – need to remain alert when signs
begin to indicate the industry might be vulnerable," she concluded.
Attachment: Remarks By Donna Tanoue Chairman Federal Deposit Insurance
Corporation Before RMA's Annual Conference of Lending and Credit Risk Management
potentially affected."
Chairman Tanoue stressed: "Effective risk management is the bank manager's most
important bulwark against credit loss and bank failure. This is true not only in bad times,
but in the best of times."
Likening the FDIC to a kind of economic weatherman, Chairman Tanoue said that the
agency had recently "pointed out that a number of cities nationwide are at risk for
overbuilding commercial real estate. This does not necessarily mean that these cities
are headed inevitably for the kind of real estate crisis we experienced in the late 1980s
and early 1990s."
She noted that a tornado watch does not mean that severe weather is inevitable, but
that "conditions exist for the development of a tornado and that one needs to keep up to
date on the latest weather information."
"I too hope that the economic expansion will continue unabated and that local real
estate markets remain healthy and stable," Chairman Tanoue told the risk managers.
"However, as you know, hope is not a risk mitigation technique."
"All of us – regulators, risk managers, and developers – need to remain alert when signs
begin to indicate the industry might be vulnerable," she concluded.
Attachment: Remarks By Donna Tanoue Chairman Federal Deposit Insurance
Corporation Before RMA's Annual Conference of Lending and Credit Risk Management