The SEC is asking smaller financial institutions,
including community and regional banks, about their exposure to risks from commercial real
estate in their loan portfolios, The
Wall Street Journal reported.
The SEC released four letter exchanges in the
past week or so in which it questioned some financial firms about this exposure.
The SEC has been scrutinizing banks after the high-profile bank failures last year, concerned that more banks highly
concentrated in property debt may fail.
Publicly traded financial firms Alerus Financial and
the holding companies behind Mid Penn Bank, Ohio Valley Bank and MainStreet
Bank were among those that received letters the SEC recently made public, the
Journal reported.
The Federal Reserve defines community banks as
those holding under $10 billion in assets. Regional banks are defined as holding
between $10 billion and $100 billion.
The commercial property sector has been wounded
by rising interest rates and high vacancies, causing financial regulators to
watch for the possibility of losses in that sector will affect the broader financial
system in a potential repeat of the 2008-09 financial crisis.
The letters signal the SEC’s growing interest in
whether investors can adequately assess a bank’s financial soundness based on
disclosure of their loan portfolios, said Kenneth Chin, a partner at law firm Kramer
Levin Naftalis & Frankel, in an interview with the Journal. “The SEC is worried that some
of the banks may not be disclosing as much of their risk or exposure as they
should to their investors.”
The SEC generally has not asked corporate
borrowers or other industries outside of banking about their risks related to
commercial property, based on publicly available letters, the Journal reported.
Smaller banks could take a significant hit to their financials with just a few
loan defaults, Chin said.
“Borrowers may not be able to
refinance, or alternatively you may end up having some losses on the portfolio,
which could really adversely impact a smaller bank’s financials,” he said.