Liquidity & Balance Sheet
Construction Loan Concentration
Also known as Construction Conc.
The Construction Loan Concentration measures construction, land, and land development loans as a percentage of total risk-based capital. The 2006 interagency guidance threshold of 100% is the most-watched construction risk indicator.
Formula
Construction loans fund new buildings before they generate cash flow to service the debt. Land loans finance raw land purchases. Land development loans fund the conversion of raw land into buildable lots. All three are inherently more speculative than completed-property CRE.
Why it matters
Construction loans were the dominant cause of bank failures in the 2008-2010 cycle. They have the highest historical loss rates of any commercial loan category. The 100% of capital threshold in the 2006 interagency guidance separates banks that can comfortably absorb a construction downturn from those whose capital is exposed.
How to interpret
Most US community banks report construction concentration between 25% and 90%. The 100% interagency threshold marks the supervisory line. Banks above 150% are construction specialists that need to demonstrate sophisticated underwriting and stress testing.
Thresholds
| Range | Label | Interpretation |
|---|---|---|
| < 50% | Low | Limited construction exposure. |
| 50–100% | Moderate | Within interagency threshold. |
| 100–150% | Elevated | Above interagency threshold. |
| > 150% | High | Heavy construction concentration risk. |
Worked example
Frequently asked
Why are construction loans riskier than other CRE?
Construction loans fund property development before cash flows exist to service the debt. The borrower's ability to repay depends on completing construction on time and on budget, then either selling the property or refinancing into a permanent loan. Both completion risk and refinancing risk are elevated.
Sources
- FFIEC Call Report Schedule RC-C (Loans)
- FFIEC Call Report Schedule RC-R (Risk-Based Capital)
See Construction Conc. across 4,394 US banks
BankRegReports ranks every FDIC-insured institution by Construction Conc., refreshed quarterly within 48 hours of FFIEC release.