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CRE Risk To Banks Is 'Manageable,' Powell Reiterates In Congressional Appearance

Jerome Powell speaks to a Senate committee in 2020.

Federal Reserve Chair Jerome Powell described the risk posed by commercial real estate to the national banking system as “manageable” in remarks made to Congress Wednesday, but he also predicted losses for some banks.

Powell’s wide-ranging remarks were closely watched for any hints about the direction interest rates might travel, but Connecticut Rep. Jim Himes directly asked about the chair’s level of concern around commercial real estate.

“I think it’s manageable,” Powell said. “We’ve been working hard to manage it for some time now.”

Powell’s appearance followed the release last week of the Fed’s biannual Monetary Policy Report to Congress, which called out CRE as a continued risk factor for banks, especially smaller ones.

“Some smaller regional and community banks with high concentrations of CRE loans are also highly reliant on uninsured deposits, potentially compounding vulnerabilities,” the report states.

With nearly $3T of CRE debt set to mature in the next five years and 70% of all bank-held CRE loans coming from small banks, it’s clear the tumult in the commercial property industry will remain a threat to the banking system for the foreseeable future.

“There will be losses by some banks,” Powell said Wednesday, as reported by Barron's, adding that exposed small and midsize banks will need to improve their liquidity positions and plan ahead for potential losses.

“We're going to keep our eye on the ball with commercial real estate,” Powell told Congress.

As for interest rates, Powell restated his organization’s need for more economic data before it commits to lowering the base rate but said cuts are likely this year.

“When we reach that confidence, the expectation is we will do so sometime this year, we can then begin dialing back,” Powell said.

The Fed’s efforts to keep banks deeply affected by the growing pool of delinquent debt tied to commercial property have been a common refrain for Powell so far in 2024. 

During an interview on 60 Minutes in early February, Powell predicted more closures or mergers, particularly among small and midsize banks as CRE debt works its way through the financial system. 

“It’s a lot of downtown real estate where there’s too much office supply because of work from home,” Powell said during the interview. “And also, you know, the kind of downtown retail that is no longer as profitable. And things like that are really at the heart of it.”

Around the time of that interview, U.S. Treasury Secretary Janet Yellen also spoke publicly about CRE’s impact on the banking system. Speaking before a Senate banking committee, she mirrored Powell’s statements about the relative safety of larger banks and downplayed concerns about systemic risk while acknowledging how CRE’s pain is filtering through the capital markets.

“Valuations are falling. And so it’s obvious that there’s going to be stress and losses that are associated with this,” she said.

It has been nearly one year since the failure of Silicon Valley Bank sent shockwaves through the country’s financial system. The closures of Signature Bank and First Republic Bank added to the concern, along with mounting debt loads and depressed occupancy rates. 

New York Community Bancorp, which acquired a large portfolio from Signature Bank, has spent much of 2024 fighting the effects those troubled loans have had on its books. NYCB posted $252M in losses in a January earnings call, resulting in a stock price freefall. 

But the bank seems to have caught a lifeline, announcing Wednesday afternoon that it has secured $1B in equity from a company tied to former Treasury Secretary Steven Mnuchin and replaced its CEO for the second time in a week.