Federal Reserve Chairman Jerome Powell has predicted that weakness in commercial real estate will likely cause more small banks to close or merge, but that the problem is ultimately “manageable.”
The central bank official made the point in an interview with “60 Minutes” that aired Sunday night, Powell's first comments about the financial industry since fresh turmoil rippled through the stock prices of many regional banks.
“I don't think there is a high risk of a repeat of what happened in 2008,” Powell said, referring to the financial crisis 16 years ago that led to the collapse of some of Wall Street's biggest financial institutions and hundreds of banks across the country.
“I think this is a manageable problem,” he added.
Federal Reserve Chairman Jerome Powell. (Alex Brandon/Associated Press) (Associated Press)
The renewed concerns about regional banks were sparked after $116 billion commercial real estate lender New York Community Bancorp (NYCB) shocked Wall Street last Wednesday by cutting its dividend, reporting an unexpected quarterly loss and setting aside millions of dollars for future loan losses related to its commercial real estate holdings.
Shares of the Hicksville, New York-based financial company fell 38% on Wednesday and another 11% on Thursday, dragging the broader industry along with it in the decline. The stock recovered on Friday but fell again on Monday as shares of New York Community Bancorp fell more than 10%.
In an interview with “60 Minutes,” Powell acknowledged that some smaller banks will be forced to “close” or “disappear” due to losses caused by the Fed's interest rate hikes and the resulting sharp decline in real estate values across the country as many urban buildings become empty due to the pandemic.
But “after looking at the balance sheets of the big banks, this appears to be a manageable problem,” Powell said.
“There are some smaller regional banks that have concentrated exposure in these troubled areas. And we're working with them. This is something we've been aware of for a long time, and we're working with them to make sure they have the resources and the plans to weather the expected losses.”
Regional banks are especially vulnerable because they have much greater exposure to these properties than larger banks: For banks with more than $100 billion in assets, commercial real estate loans make up just 13% of total lending. For smaller banks, they make up 44% of total bank lending.
Loans related to office and certain multifamily properties have shown the weakest performance, although not all segments of commercial real estate are expected to face the same challenges.
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Meanwhile, demand for commercial real estate loans from U.S. banks weakened in the fourth quarter of 2023 as bank officials tightened standards, according to a new Fed report released on Monday. Officials expect standards to remain tight in 2024 for all loan categories except residential real estate.
David Chiaverini, a regional and mid-market bank analyst at Wedbush Securities, told Yahoo Finance that commercial real estate “would be better managed by other banks” than New York Community Bancorp, which also has heavy exposure to rent-controlled apartment complexes in New York City. Such buildings account for 22% of the bank's loans.
New York Community Bancorp has a large presence in New York City. (Mike Seeger/Reuters/File Photo) (Reuters/Reuters)
Chiaverini said the bank should have set aside more reserves last year while booking a gain from buying the assets of failed Signature Bank.
“I would say the severity of the problem is unique to New York Community Bank because the bank has too few reserves relative to the risks in its portfolio,” he added.
The “worst case scenario” that could cause problems for the industry, Chiaverini said, is that inflation rises again, forcing the Fed to keep interest rates high for an extended period of time and plunging the US economy into recession, which would mean borrowers would have a hard time paying back their loans.
Barring that, the pain in commercial real estate should be “manageable” for banks, he added.
The Fed chairman repeated the same phrase three times in the “60 Minutes” interview.
“It should be manageable,” Powell said.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrency and other areas of finance.
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