Yellen expects commercial real estate losses to put ‘stress’ on banks

Treasury Secretary Janet Yellen said bank commercial real estate could lead to some stress on smaller businesses, but it shouldn’t become a systemic risk. Photography: Andrew Harrer/Bloomberg

Andrew Haller/Bloomberg

WASHINGTON – Treasury Secretary Janet Yellen said rising commercial real estate vacancies and rising interest rates will hit the banking sector, but she does not expect it to pose a systemic risk.

Yellen’s comments come amid a tumultuous week for New York community banks. New leadership quickly takes over try Allaying concerns about its foray into commercial real estate Yellen did not comment directly on the situation in New York neighborhoods during her testimony before the Senate Banking Committee, but said vacancy rates at office towers in the metropolitan area have increased significantly.

Add to that a sharp rise in interest rates and falling valuations, she said.

“So, clearly there are going to be stresses and losses associated with this,” she said. “Bank regulators are working with banks to manage this risk and identify it. I don’t believe this will ultimately – and I hope – be detrimental to banks. The system poses systemic risks.”

Yellen said the largest banks’ risk exposures are quite low, but “these developments could put pressure on smaller banks.”

She said the Financial Stability Oversight Council, where Yellen is Treasury secretary, is working with bank regulators to understand risk exposures.

Yellen said: “We know that some institutions will face pressure on commercial real estate, especially office buildings affected by the epidemic. Interest rates are higher, and loans will need to be refinanced in a higher interest environment.” … Valuations are lower, Vacancy rates are rising, so for some banks, that’s going to be a problem. But overall, I think the system is well capitalized. ”

Only Sen. Elizabeth Warren, D-Mass., raised the issue with the New York community, making it part of a bank capital issue. Warren said banking groups strongly opposed the final Basel III rulemaking, claiming higher capital costs would result in higher prices for consumers.

“Less than a year after three billionaire banks failed, another New York community bank is now teetering on the edge,” Warren said. “So we just want to make sure these giant banks don’t go bankrupt and get back on their feet.” American taxpayers Get bailed out just like they used to. ”

Warren said the Banking Association’s claim that proposed changes to capital rules would harm bank customers was misleading. Instead, the final Basel III rulemaking will increase capital standards for the largest banks, which will cut banks’ repurchase and execution costs. compensation.

“They spent millions of dollars lobbying and even ran ads during the NFL playoffs claiming that if they had to be safer, it would somehow raise the price of groceries for American families. In other words, they want us to believe that “The big banks are really worried about Americans’ grocery bills. No one believes this. ”

Yellen clearly outlined her support for higher capital standards in her response to Warren’s question, although Warren did not directly ask Yellen whether she supports the actual final Basel III proposal from banking regulators. Yellen said the proposal would have no impact on smaller community banks.

Earlier this week, Yellen has repeatedly declined to explicitly support or condemn the proposed capital rules, That’s despite her feeling comfortable commenting directly on other financial regulations being pursued by other regulators within the Biden administration.

“Even in normal times, banks have to have capital in order to lend, so meeting the borrowing needs of households and businesses across the economy is crucial,” she said. “When a shock like the one we saw in the financial crisis hits, , if a bank exhausts its capital, it could fail, and if it is a large bank or a bank that is highly interconnected with other financial institutions, its failure could have devastating consequences for the entire financial system.”

Kevin Frommer, president and chief executive of the Financial Services Forum, which represents the largest U.S. banks, immediately pushed back on Warren’s characterization of the capital rules and her remarks surrounding them.

“Proposals to significantly increase capital requirements for America’s largest banks are a solution in search of a problem,” he said in a statement to American Banker. “That’s why you see people treating any banking issue – no matter how inconsequential – as a problem. Not surprising as a solution,” trying to demonstrate the opportunity to increase capital. Using unrelated issues involving a handful of regional banks to justify increasing capital requirements for large banks is misleading and wrong. As many organizations, such as the NAACP, National Association of Manufacturers and CalPERS, warn, higher capital requirements will be a drag on the economy, especially for small businesses and businesses in low- and moderate-income communities. “

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