Policy Backgrounders

Commercial Real Estate Concerns and Forthcoming Bank Regulations

February 09, 2024

Trusted Insights for What’s Ahead™

• Treasury Secretary Janet Yellen and Federal Reserve Chair Jay Powell each raised concern this week over smaller and midsize US banks’ exposure to commercial real estate (CRE), highlighting the potential for renewed banking stress in 2024 following the failure of three regional banks last spring.
• Yellen and Powell each commented that banks’ holdings of CRE loans posed a sizable problem that could have a wide impact across smaller and midsize banks. However, both officials offered assurance that while a “sizeable problem” banks’ overall exposure to CRE is “manageable” when looking at larger banks’ balance sheets and that supervisors are monitoring the issue and working with medium size banks where challenges have been identified.
• Market pressure on New York Community Bancorp may be the first sign of renewed regional bank stress, with the company’s stock falling more than 60% after its January 31 earnings report that showed a significant loss on commercial and multifamily property loans and a surge in its loss reserves for the coming year.
• Updates to bank regulations proposed after 2023’s bank failures are continuing to be developed, while regulators are currently processing the deluge of comments received on the initial proposals. Final rules are likely to come later in 2024 and 2025.
• The combination of the expected losses on CRE loans, which are concentrated in midsize banks, and proposed rules that would extend stricter requirements to all banks larger than $100 billion in assets has the potential to reshape the nation’s financial services sector through consolidation and through greater activity shifting to less-regulated nonbanks.