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Concerns Arise Over US Commercial Real Estate Stresses, Deemed Manageable

Concerns Arise Over US Commercial Real Estate Stresses, Deemed Manageable

U.S. Treasury Secretary Janet Yellen expressed her concerns on Tuesday regarding the impending stresses faced by banks and property owners in the commercial real estate sector. Speaking at a House Financial Services Committee hearing, Yellen highlighted the challenges posed by the refinancing of commercial real estate loans amidst higher interest rates and increased vacancies due to evolving work patterns.

Acknowledging the potential strain on some banks arising from reduced demand for commercial real estate in the aftermath of the COVID-19 pandemic, Yellen emphasized the proactive approach of banking supervisors in assisting institutions to manage these risks. While expressing her belief in the manageability of the situation, Yellen acknowledged the possibility of some institutions facing considerable stress.

The Financial Stability Oversight Council is actively monitoring the commercial real estate market, with a focus on collaborating with bank supervisory agencies to support borrowers encountering difficulties. Yellen outlined various measures being undertaken, such as building up loan loss reserves, ensuring appropriate dividend policies, and maintaining adequate liquidity levels, to mitigate potential adverse impacts.

The recent sell-off in the banking sector following reports of commercial real estate portfolio problems at New York Community Bancorp underscored the ongoing challenges in the industry. Reflecting on past failures in the banking sector, Yellen affirmed the Treasury’s commitment to safeguarding deposits at banks facing financial contagion risks, albeit without considering blanket insurance for all deposits without congressional approval.

When questioned about measures to prevent a second wave of bank failures, Yellen underscored the importance of collaborative efforts with banking supervisors to address any systemic risks that may arise. While refraining from commenting on individual bank situations, Yellen reiterated her dedication to working closely with regulators to maintain financial stability.

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