Federal Reserve Chairman Jerome Powell says more small banks are likely to close or merge due to vulnerabilities in commercial real estate, but the problem is ultimately “manageable.” We predict that.
A central bank official made this point in an interview on 60 Minutes that aired Sunday night. Mr. Powell's first comments on the industry came as fresh turmoil affected the stocks of many local banks.
“I don't think there's much risk of a repeat of 2008,” Powell said, referring to the financial crisis of 16 years ago, when some of Wall Street's biggest financial institutions and hundreds of banks across the country collapsed.
“I think it's a manageable problem,” he added.
New concerns for local banks have been triggered by $116 billion commercial real estate finance company New York Community Bancorp (NYCB), which cut its dividend last Wednesday, reported an unexpected quarterly loss and declined to make future loans. It shocked Wall Street by stockpiling millions of dollars in case of losses. Commercial real estate holdings.
Shares of the Hicksville, New York-based lender fell 38% on Wednesday and another 11% on Thursday, with other sectors falling as well. The stock recovered on Friday, but was back in the red on Monday. New York Community Bancorp fell more than 7% in morning trading.
Chairman Powell said in an interview on 60 Minutes that some small banks will be “shut down” due to losses associated with falling real estate values across the country, which have suddenly become much cheaper due to increased Federal Reserve interest. He acknowledged that the two companies would have to merge and “disappear.” Interest rates and the impact of the pandemic, which has left many city center buildings empty.
But Powell told 60 Minutes: “I looked at the balance sheets of the big banks and it looks like it's a manageable problem.”
“There are some smaller regional banks that are concentrating their exposure in these difficult areas. And you know, we're working with them. This is something we've recognized for a long time. And we are working with them to ensure they have the resources and plans to weather the expected losses.”
Local banks are particularly vulnerable because they have far more exposure to these properties than their larger rivals. For a bank with more than $100 billion in assets, commercial real estate loans represent only 13% of total credit. For small banks, it accounts for 44% of total bank credit.
Loans related to offices and certain types of apartment buildings have been the weakest. Not all segments of commercial real estate face the same issues.
“Other banks manage commercial real estate better than New York Community Bancorp, which is also rent-sensitive,” David Chiaverini, a regional and midsize bank analyst at Wedbush Securities, told Yahoo Finance. It will be done,” he said. Managed housing complex in New York City. These buildings account for 22% of the loan.
Chiaverini said the bank should have set aside more reserves last year while recording profits from asset purchases from failed Signature Bank.
He added: “The severity of the problem is almost unique to New York Community Bank, which had very low reserves relative to the risks in its portfolio.”
The “perfect storm” that could cause problems for the rest of the industry, Chiaverini said, is that inflation rises again, forcing the Fed to keep interest rates the same for an extended period of time, and the U.S. economy slips into recession. It is said that it is a thing. This would make it difficult for the borrower to continue repaying the loan.
If this doesn't happen, commercial real estate pain should be “manageable” for banks, he added.
The Fed chairman repeated the same words three times during the 60 Minutes interview.
“It should be manageable,” Powell said.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
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