, the concentration level for this same bank group was about 150 percent, or half the current level. therefore, banks should not be surprised by the emphasis in the proposed cre guidance on concentrations and the importance of portfolio risk management. historically, cre has been a highly volatile asset class. in the past, problems in cre even at well managed banks have generally come at times when the broader market encounters difficulties. borrowers and bankers with properties in distress can disrupt their local real estate market by cutting rents or offering leasehold improvements and other incentives to attract or keep tenants in an effort to generate cash flow. this can negatively affect the local real estate market as a whole, and adversely affect even good projects. cre is a highly volatile asset class in that credit losses in most years are relatively low compared with many other types of bank loans. but in times of stress, the loss rate on cre can jump considerably higher relative to the good years, compared with the behavior of other types of loans. since cre losses tend to be concentrated in these times of stress, bankers must focus more intently on their risk appetite for losses as their concentration grows. this means considering how much capital can be placed at risk if the portfolio of cre loans hits a stress period and comparing that loss exposure to the relative returns in cre lending, i. e., practicing risk management. while banks ’ underwriting standards are generally stronger than they were in the 1980s and 1990s, the agencies are proposing the guidance now to reinforce sound portfolio - management principles that a bank should have in place when pursuing a commercial real estate lending strategy. a bank should be monitoring performance both on an individual - loan basis as well as on a collective basis for loans collateralized by similar property types or in the same markets. some institutions ’ strategic - and capital - planning processes may not adequately acknowledge the risks from their cre concentrations. cre lending in recent years has occurred under fairly benign credit conditions and, naturally, those conditions are unlikely to continue indefinitely. the ability of banks with significant concentrations to weather difficult market conditions will depend heavily on their risk - management processes and their level of capitalization. from a risk - management and capital perspective, institutions should generally focus on the emerging conditions in their real estate markets and on the potential cumulative impact on their portfolios if conditions deteriorate, and they should take other measures to help identify cre vulnerabilities. of course, these measures should vary according to the size of

they may not be paying close enough attention to the aggregation of their exposures or concentrations that arise in the resulting portfolios of business. also, rapid growth can place considerable pressure on an organization's management information systems, change - management controls, strategic planning, credit concentrations, and asset / liability management, among other areas. many of the companies that have attracted public attention in recent years due to serious breaks in controls failed to focus on process changes and critical investments in their risk management and control systems that were needed to successfully support their business plans. an organization must also understand how its various business components dynamically interact. a successful enterprise - wide risk management process can help to meet many of these challenges. at the same time, it is clear that risk management practices need to be applied in a manner appropriate to the size and complexity of the organization. while the leading - edge risk - management practices used at the largest, most complex banks may have some applicability at smaller, less complex banks, data and cost limitations require greater use of more generalized models and the use of outsourcing to supplement the knowledge base of the institution. and as most of you know, running a smaller or less complex bank presents different types of challenges and requires a risk - management framework appropriately tailored to the institution. for example, transactions may be conducted more on a relationship basis and may be less data - intensive. in such a case, bank management needs to develop risk - management tools that allow it to ensure that risks are still being appropriately addressed. further, smaller organizations often face a challenge of ensuring independent review of processes and decisions since officers and staff often have multiple responsibilities that can present conflicts of interest. many of you are probably familiar with the enterprise risk management framework published over a year ago by the committee of sponsoring organizations of the treadway commission, or coso. the coso framework provides a useful way to look at enterprise risk management. notably, the coso framework states explicitly that, while its components will not function identically in every entity, its principles should apply to institutions of all sizes. small and mid - size entities, for example, may choose to apply the framework on a less - formal and less - structured basis and scale it to their own needs - - as long as quality is maintained. this underscores the message from bank supervisors that good risk management is expected of every institution, regardless of size or sophistication. naturally, some tension will still exist between what supervisors expect and how bankers