Risk to banks from commercial real estate (CRE) investments continues to be of concern to federal banking supervisors, the Federal Reserve’s top supervisor indicated in a speech Friday.
Federal Reserve Board Vice Chairman for Supervision Michael Barr, in a wide-ranging speech on the Fed’s bank supervision activities in the upcoming one-year anniversary of the failure of Silicon Valley Bank (SVB), said that reduced demand for office space and higher interest rates have put pressure on some CRE valuations, particularly in the office sector.
Barr made the remarks in New York, N.Y., at the Annual Columbia Law School Banking Conference.
“Supervisors have been closely focused on banks’ CRE lending in several ways: how banks are measuring their risk and monitoring the risk, what steps they have taken to mitigate the risk of losses on CRE loans, how they are reporting their risk to their directors and senior management, and whether they are provisioning appropriately and have sufficient capital to buffer against potential future CRE loan losses,” Barr said.
Barr said Fed supervisors have issued more supervisory findings and downgraded firms’ supervisory ratings at a higher rate in the past year since the SVB failure. He said the agency has also increased its issuance of enforcement actions. “These actions do not represent a change in policy; they reflect the impact of the changing economic, interest rate, and financial environment on a bank’s financial resources,” Barr said. “We want and expect supervisors to help banks focus adequate attention on the areas that matter most for the particular bank, whether that is interest rate risk, CRE, or cybersecurity vulnerabilities, to name a few.”
Barr said the Fed continues to consider whether it should temporarily require additional capital or liquidity beyond regulatory requirements where the firm has trouble in managing its risks. “Higher capital or liquidity requirements can serve as an important safeguard until risk controls improve, and they can focus management’s attention on the most critical issues,” he said. “Other supervisors use these types of tools, and we can draw from these experiences as we consider what may be appropriate for our supervised banks.”