Economic news

Yellen sees more commercial real estate stress, losses, but no systemic banking risk

2024.02.08 18:44


© Reuters. FILE PHOTO: U.S. Treasury Secretary Janet Yellen in Mexico City, Mexico December 6, 2023. REUTERS/Daniel Becerril/File Photo

By David Lawder

WASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen mentioned on Thursday that she expects extra financial institution stress and monetary losses from weak point within the commercial real estate market but believes this won’t pose a systemic risk to the banking system.

Yellen advised a Senate Banking Committee listening to that financial institution regulators are working with banks to handle dangers attributable to increased post-pandemic emptiness charges for a lot of workplace buildings in bigger cities, and better rates of interest for refinancing loans.

“Valuations are falling. And so it’s obvious that there’s going to be stress and losses that are associated with this,” Yellen mentioned.

“I hope and believe that this will not end up being a systemic risk to the banking system. The exposure of the largest banks is quite low, but there may be smaller banks that are stressed by these developments.”

She didn’t straight deal with the stock-market sell-off skilled by New York Community Bancorp (NYSE:), which final week reported a shock fourth-quarter loss after constructing greater provisions for potential commercial real estate mortgage defaults.

The incident additionally has hit shares of another regional U.S. banks as traders concern weak demand for workplaces may set off a wave of defaults and stress banks, that are hoping to keep away from promoting commercial real estate loans at vital reductions.

Yellen’s testimony marks the second time this week that she sought to downplay the commercial real estate dangers, telling the House Financial Services Committee on Tuesday that she was involved about stresses in commercial real estate, but that the state of affairs was manageable.

Yellen advised senators that the multi-regulator Financial Stability Oversight Council has mentioned commercial real estate dangers at each assembly over the previous yr. “We have been looking at it in a comprehensive way and working with the bank supervisors to understand exposures.”

Yellen additionally advised the listening to she was involved in regards to the absence of reasonably priced insurance coverage in some U.S. markets on account of rising local weather change pushed dangers reminiscent of storms, floods and wildfires, including that this might create a “feedback loop” that might threaten monetary stability.

“The absence of insurance or being priced out of insurance as these climate risks have intensified, is harming the well-being of households on the cost of living, and it’s also creating risks to financial stability because many banks have exposure to loans, to the risks that can come if there are uninsured losses,” Yellen mentioned.

She mentioned Treasury’s Federal Insurance Office is engaged on a survey to gather zip code-level information on traits and elements affecting the provision and pricing of insurance coverage.

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