The strong headwinds that are facing financial institutions in the United States will likely continue from some time, said a Federal Reserve official on Monday, suggesting that struggles in the commercial and residential real estate are far from over.
Jon Greenlee, the Federal Reserve’s associate director of banking supervision and regulation said, “Two years into a substantial economic downturn, loan quality is poor across many asset classes and … continues to deteriorate.”
Greenlee appeared before a U.S. House panel in Atlanta on Monday and commented that the banking system is “far from robust and the healing process is just beginning.” Greenlee continued by stating that foreclosures and losses from residential real estate will likely to remain elevated and significant credit losses are a real possibility for many firms.
A key area for concern amongst regulators is the commercial real estate market. Specifically, falling commercial real estate problems and problems in the residential housing market could cause many commercial real estate portfolios to drop in value dramatically, which could lead to more bank failures.
“The losses will place continued pressure on banks’ earnings, especially those of smaller regional and community banks that have high concentrations of CRE loans,” Greenlee said.
Federal regulators took ne steps to address this issue on Friday releasing guidance that would allow banks to consider commercial loans as “performing”, even if the property backing the loan falls in value. These new guidelines hope to encourage banks to rework their troubled commercial loans to avoid costly defaults.
Greenlee noted that prices of existing commercial properties have declined sharply from their record highs and will likely continue to decline.
Greenlee added, “Some large regional and community banking firms that have built up unprecedented concentrations in CRE loans will be particularly affected by emerging conditions in real estate markets.”
