The Financial Stability Oversight Council (FSOC) says it still has concerns about commercial real estate loan holdings at banks and insurance companies.
FSOC, an agency that’s supposed to help the federal government understand forces that could wreck the U.S. financial system, talks about commercial real estate loan risk in its new annual report.
In the 2016 report, FSOC mentioned financial institutions’ commercial real estate investments briefly. The council gave more attention to the possible effects of low interest rates on insurance companies, but it said low rates had not caused a significant shift in insurers’ investment allocations.
In the new report, FSOC says life insurers do seem to be changing their investment allocations in response to low rates.
“Among life insurers in 2016 and the first half of 2017, investments in mortgage loans increased 14.2%, and those in common stocks increased 22.4%, as total cash and investments overall increased 7.6%,” FSOC says.
FSOC put this year’s discussion of “Valuations in Commercial Real Estate” in a blue box of its own.
Commercial real estate loan growth at banks and insurance companies has been strong over the past two years, FSOC says.
The council says it’s looking out for problems with risk pricing or loan underwriting standards, and for high concentrations of commercial real estate loan risk at certain financial institutions.
FSOC says commercial real estate prices seem to be increasing faster than the amount of income properties can generate.
That trend may be a sign that commercial real estate valuations are stretched, FSOC says.
The drafters of the Dodd-Frank Act created FSOC in an effort to prevent the kinds of problems that led to the Great Recession. Treasury Secretary Steven Mnuchin is the council’s head.
Copies of FSOC’s 2016 report and its 2017 report are available here.
—Read FSOC Warns About Low Interest Rate Environment Ramifications on ThinkAdvisor.