Federal Reserve Chairman Jerome Powell said Thursday he expects some banks to fail due to their exposure to the commercial real estate sector, which has seen its value fall sharply as the shift to remote work has become more widespread.
Mr. Powell said the banks struggling with losses in office space and retail assets are not the big ones that were designated “systemically important” after the 2008 financial crisis, which also was sparked by distressed real estate assets that led to taxpayer bailouts of the financial sector.
Rather, it is small and mid-sized banks that Powell has identified as currently at risk of failure.
“This is something we'll be dealing with for years to come. We'll see bank failures,” he said at a Senate Banking Committee hearing on the Fed's monetary policy.
“This is not primarily an issue for the big banks. It's more the smaller banks that are having these issues. We are working with them. We are trying to get through this. My word is, I think this is manageable,” he said.
Powell did not go into detail about specific regulatory actions currently being taken by the Federal Reserve, the issuer of the federal currency and the primary bank regulator, regarding commercial real estate exposure, but said it has identified the riskiest banks.
“We're having conversations with them: Are you addressing this? Do you have enough capital? Do you have enough liquidity? Do you have a plan? You're going to take losses here, but are you being honest with yourselves and your owners?” he said.
Commercial real estate investment trusts, known as REITs, have been hit hard over the past few months, with Alexandria Real Estate Equities Inc., Boston Properties Inc., Kilroy Realty Corp. and Vornado Realty Trust Inc. all in negative territory since the start of the year.
Powell described the decline in commercial real estate values as a result of remote work following the economic shutdown caused by the pandemic as a “secular shift” in the economy.
“In many cities, downtown office districts are very thinly populated. Many large and smaller cities have vacant buildings. That also means all the retail that was there to serve the thousands of people who work in those buildings is also under pressure,” he said.
While the decline in commercial real estate values could lead to some bank failures, Powell expressed confidence that the Fed and financial regulators can limit the impact and prevent a broader crisis. Thirty-four U.S. banks have failed since 2015, according to the Federal Deposit Insurance Corporation, which insures deposits at regulated banks.
The Federal Reserve and Treasury also rescued Silicon Valley Bank and Signature Bank last year and have provided bailouts for other struggling banks that threaten broader confidence in the banking system.