Powell: ‘There will be bank failures’ caused by commercial real estate losses

Federal Reserve Chairman Jerome Powell said Thursday that he expects some banks to fail due to their exposure to the commercial real estate sector, whose value has fallen sharply due to the shift to working from home. Stated.

Powell said the banks suffering from a decline in office space and retail assets are not the large banks designated as “systemically important” after the 2008 financial crisis. The case that led to a bailout of the financial sector by taxpayers was also triggered by unsound real estate assets.

Rather, Powell recognizes that the banks currently at risk of failure are small and medium-sized.

“I think this is an issue that we’re going to be dealing with for many more years. Bank failures are going to happen,” he said during Thursday’s Senate Banking Committee hearing on the Fed’s monetary policy.

“This is not a primary problem for any very large bank. It’s the small and medium-sized banks that have these problems. We’re working with them. We’re getting through it. It’s manageable. I think that’s the word I want to use,” he said.

Powell did not go into detail about the specific regulatory actions the Fed, which is the issuer of federal currency and one of the major banking regulators, is currently taking regarding commercial real estate exposures, but did say it had identified a problem. Stated. Banks are most at risk.

“We’re talking to them. Are you committed to this issue? Do you have enough capital? Do you have enough liquidity? Do you have a plan? Here you are going to suffer losses. “Are you being honest with yourself and with the owner?” he said.

Commercial real estate investment trusts, known as REITs, have taken a hit over the past few months. Alexandria Real Estate Equities, Boston Properties, Kilroy Realty Corporation, and Vornado Realty Trust have all been in negative territory since the beginning of the year.

Powell described the decline in commercial real estate values ​​as a result of remote work after the pandemic shut down the economy as a “long-term shift” in the economy.

“In many cities, downtown business districts are very undercrowded. Many large cities and small and medium-sized cities have vacant buildings. They also have to serve thousands of people who work in those buildings. It means that all the retail businesses that existed are also under pressure,” he said.

While falling commercial real estate prices could put some banks out of business, Powell expressed confidence that the Fed and financial regulators can limit the impact and prevent a broader crisis. 34 US banks Bankruptcies have been occurring since 2015, according to the Federal Deposit Insurance Corporation (FDIC), which insures deposits at regulated banks.

The Fed and Treasury also bailed out Silicon Valley Bank and Signature Bank last year and took action to extend a lifeline to other troubled banks that threaten widespread confidence in the banking system.