The Federal Reserve is again sounding the alarm on commercial real estate, sharpening its focus on office-heavy loan books at community and regional banks that are absorbing the brunt of the post-pandemic reset.
In its latest supervision and regulation report, the central bank cited “elevated interest rates, tighter underwriting standards and lower commercial property values” as pressure points that could complicate refinancings and push more borrowers toward distress, Bloomberg reported.
For real estate players, the subtext is familiar: lenders are bracing for more pain across offices and other challenged asset classes. The Fed’s message isn’t that banks are in danger but that the CRE drag is persistent and refinancing risk remains elevated.
With valuations drifting lower and buyers hesitant, banks holding CRE debt are navigating a landscape where even stable sponsors can struggle to extend maturing loans. Fed supervisors said they’re not just tracking CRE trends but also scrutinizing credit-loss reserves and how aggressively banks are marking their portfolios.
While the Fed found most institutions still well above minimum capital thresholds through the second quarter, watchdogs are taking a closer look at capital planning and liquidity management on Wall Street, according to the report.
The latest round of stress tests suggested big banks could weather a recession without triggering capital breaches or a freeze in lending, but policymakers are trying to keep attention trained on “material risks” — including interest rate impacts and cybersecurity threats — a mantra championed by Fed Vice Chair for Supervision Michelle Bowman.
Regulators have eased certain capital rules this year and recently finalized tweaks to ratings for large banks, but the Fed signaled fresh vulnerabilities are cropping up. A spate of private credit defaults has raised concerns about banks’ indirect exposure to nonbanks, where leverage is higher and oversight lighter.
Supervisors plan to monitor that channel closely as traditional lenders keep partnering with private credit platforms hungry for deal flow.
The agency is also deepening its review of banks’ recovery plans, focusing on how quickly institutions can marshal real-time data if those plans ever need to be activated. That includes strategies to shore up liquidity for key operations under multiple resolution scenarios.
— Holden Walter-Warner
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