Federal Reserve Chairman Jerome Powell has joined a growing group of U.S. officials who say that while rising bad commercial real estate loans will likely cause some banks to fail, they do not pose a risk to the financial system as a whole.
The Fed governor told lawmakers on the Senate Banking Committee on Thursday that the Fed is working with financial institutions to make sure they are managing potential losses. His comments echoed Treasury Secretary Janet Yellen's assessment last month that while some failures are possible, the situation is “manageable.”
“We have identified banks that are highly concentrated in commercial real estate, particularly office and retail and other properties that have been significantly affected,” he said. “We believe this is something that we will be dealing with for years to come. Bank failures will happen, but they will not be the big banks.”
Financial regulators have said for months that they are closely monitoring the impact of the commercial real estate market downturn on the financial system.
The potential risks were highlighted by the recent troubles at New York Community Bancorp, which was fueled by concerns related to a portfolio that included billions of dollars in apartment loans in rent-regulated New York apartment complexes. After weeks of turmoil, New York Community Bancorp's shares are soaring after investors including former Treasury Secretary Steven Mnuchin put about $1 billion into the bank.
Meanwhile, Martin Grunberg, chairman of the Federal Deposit Insurance Corp., said Thursday that illiquid rates on non-owner-occupied CRE loans have risen to the highest level since 2014. He said the banking industry remains strong, but “the deterioration of certain loan portfolios, particularly office space and other CRE loans, merits monitoring.”
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