Federal Reserve Chair Jerome Powell is predicting that more small banks will likely close or merge due to commercial real estate weaknesses, but that the problem is ultimately “manageable.”
The central bank official made this point during a “60 Minutes” interview that aired Sunday night. It was Powell’s first comments about the industry following a new bout of turmoil cascading through the stocks of many regional banks.
“I don’t think there’s much risk of a repeat of 2008,” Powell said, referring to a financial crisis 16 years ago that took down some of the biggest institutions on Wall Street as well as hundreds of banks across the US.
“I do think it’s a manageable problem,” he added.
The new concerns about regional banks were triggered by $116 billion commercial real estate lender New York Community Bancorp (NYCB), which shocked Wall Street last Wednesday when it slashed its dividend, reported a surprise quarterly loss, and stockpiled millions for future loan losses related to commercial real estate holdings.
The stock of the Hicksville, N.Y.-based lender fell 38% on Wednesday and another 11% on Thursday, dragging the rest of the sector down with it. The stocks recovered Friday but dropped once again on Monday as New York Community Bancorp fell more than 10%.
Powell acknowledged in his “60 Minutes” interview that some smaller banks will “have to be closed” or merged “out of existence” due to losses tied to the falling values of properties across the US that are suddenly worth much less due to the Fed’s elevated interest rates and the effect of a pandemic that emptied out many city-center buildings.
But “we looked at the larger banks’ balance sheets, and it appears to be a manageable problem,” Powell said.
“There’s some smaller and regional banks that have concentrated exposures in these areas that are challenged. And, you know, we’re working with them. This is something we’ve been aware of for, you know, a long time, and we’re working with them to make sure that they have the resources and a plan to work their way through the expected losses.”
Regional banks are particularly vulnerable because they hold a lot more exposure to these properties than larger rivals. For banks with more than $100 billion in assets, commercial real estate loans only account for 13% of total credit. For smaller banks, they account for 44% of total bank credit.
Loans tied to offices and certain multifamily housing properties are showing the most weakness. Not all segments of commercial real estate are expected to face the same problems.
Demand for commercial real estate loans from US banks, meanwhile, weakened in the fourth quarter of 2023 as bank officers tightened their standards, according to a new Fed report released Monday. These officers expect standards to stay tight in 2024 on all loan categories except for residential real estate.
David Chiaverini, a regional and midsized bank analyst for Wedbush Securities, told Yahoo Finance that commercial real estate “will be managed better at some of the other banks” than at New York Community Bancorp, which also has a high level of exposure to rent-controlled apartment complexes in New York City. Those buildings account for 22% of its loans.
Chiaverini said the bank should have set aside more in reserves last year while booking a gain from its purchase of assets from the failed Signature Bank.
“The severity of the issue is, I would say, mostly idiosyncratic to New York Community Bank because they were so under-reserved relative to the risk in their portfolio,” he added.
The “perfect storm” that could create problems for the rest of the industry, according to Chiaverini, is if inflation goes back up, forcing the Fed to keep rates higher for longer, and the US economy enters a recession. Borrowers would then have problems keeping up with their loans.
If those things don’t happen, the commercial real estate pain should be “manageable” for the banks, he added.
The Fed chair repeated that same word three times in his “60 Minutes” interview.
“It should be manageable,” Powell said.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.
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