US Banks Facing $1,500,000,000,000 Tidal Wave of Debt As Federal Reserve Outlines Institutions Most at Risk

Fed Chair Jerome Powell is outlining which banks are most at risk from an immense amount of commercial real estate loan debt.

In new testimony before the Senate Banking Committee, Powell says small US banks – which are reportedly staring down at $1.5 trillion worth of CRE loan debt – are overly exposed to the sector.

“We’re spending a lot of time on these issues, and we have been for quite some time… It’s really which banks have concentrations, high concentrations, of real estate, and that is not seen in the large banks. It’s seen in some of the smaller banks, so we’ve identified those banks, and there’s a supervisory toolkit, where we work with banks to try to help them resolve those issues by raising capital or dealing with what’s happening.

Of course, what is happening in the office space nationally, there’s an issue with people working from home, and (there’s) just less demand. There’s a one-time adjustment going on. There are also some other pockets of commercial real estate where there’s some softness. So we’re working with banks to work our way through this. We’re very aware and very focused on the problem.”  

Powell says that the Fed is already taking “proactive” steps to communicate with small US banks that have high exposure to commercial real estate in an effort to avoid a repeat of the 2008 housing market crisis.

“We’re being pretty proactive about reaching out to these institutions and trying to help them get through these significant issues. Again, it’s not all smaller banks. It’s just some of them have high concentrations in real estate, and it’s not in the large banks, which of course was where the problem was in 2008-2009.” 

Powell adds that regulators must keep a close watch on small US banks following the collapse of Silicon Valley Bank and two other financial institutions earlier this year to contain the crisis in the banking sector.

“I am personally committed to learning the right lessons from what happened in Silicon Valley Bank and the other two failures… I think there’s a clear need to strengthen both supervision and regulation of banks of that size… I do think we need to learn those lessons, and I think we’ve started to do that.

What we say was an unexpected bank failure overnight led to contagion and threatened the broader banking system, and that’s not supposed to happen, and we’re going to take appropriate measures to reduce the chances that something like that would happen again.” 

As for the failure of Silicon Valley Bank, Powell admits that the Fed is largely responsible for the bank’s collapse as its supervision has been “lax” and was not “assertive enough” in hindsight.

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