Fed assessing health of some midsize banks
WASHINGTON - Federal Reserve supervisors are examining the vulnerability of medium-size lenders to falling commercial real estate values to gauge the size of potential losses across the banking system.
The Fed is focusing on banks smaller than the 19 largest lenders examined in detail in May, a central bank official said on condition of anonymity, without providing more detail about the size of the banks. Those 19 institutions held assets exceeding $100 billion.
The process involves gathering data from individual banks and comparing them to their peers, an approach known internally as a horizontal review.
Policy makers need to estimate the timing for a revival in bank lending when deciding when to withdraw emergency credit programs and record monetary stimulus. While the Fed has pumped billions of dollars of liquidity into financial institutions, total bank credit to the economy grew just 2 percent in August, compared with the same month last year, according to Fed data.
“There is a fair amount of concern about the commercial real estate credit that is going to be coming due,’’ said Kevin Fitzsimmons, managing director at Sandler O’Neill & Partners LP, a research firm in New York.
With property values in decline, few banks will want to refinance loans unless they can get more equity from borrowers, he said. “This would have a ripple effect’’ of pushing commercial property values down even more.
Banks had $1.08 trillion of commercial real estate loans on their books at the end of June, according to Federal Deposit Insurance Corp. data.
Central bank officials cited tight credit at their meeting last month as a constraint on household spending.
Since peaking in 2007, commercial property values in the United States have plummeted 36 percent as banks restricted lending after mortgage losses and the collapse of the commercial mortgage bond market, according to Moody’s Investors Service.
The property market is unlikely to recover before 2012, and office rents in New York and San Francisco may drop 20 percent through next year, according to the quarterly PricewaterhouseCoopers Korpacz Real Estate Investor Survey, released yesterday.
Construction and development loans accounted for 13.5 percent of all loans more than 90 days overdue and no longer collecting interest as of June 30, according to the FDIC.
Sales of retail properties in the United States fell 71 percent in the first half of the year, to $3.6 billion, according to the New York research company Real Capital Analytics Inc.
“When you look across a whole bunch of institutions, you find out who is managing their risk well and who isn’t,’’ said Dino Kos, managing director at Portales Partners LLC, a New York bank stock research firm. Kos was formerly head of markets at the New York Fed. “We don’t think commercial real estate loans are life-threatening for the banking system. It is a much smaller part of the portfolio than residential real estate.’’
Federal Reserve Governor Daniel Tarullois leading an overhaul of bank examinations.
He has stepped up the emphasis on horizontal reviews and enlisted a group of quantitative economists to use computer models to help estimate how banks’ assets will perform in various scenarios, from accelerating inflation to a falling property market.
