The Financial Stability Oversight Council, whose composition includes the expertise of federal financial regulators, state regulators, and an independent insurance expert, has released its latest annual report.
There’s still significant concern about the financial risks that CRE credit presents. However, given that the Biden administration has just over a month left, there are many questions about what will happen and where policies will go.
“As the Annual Report lays out, we need to continue work to ensure that banks are prepared for liquidity stress by making sure that they have diverse sources of contingency funding and the capacity to borrow at the discount window,” Secretary of the Treasury Janet Yellen said at the FSOC meeting. “This risk became more evident this year, and regulators should continue to focus on the financial industry’s ability to address it.”
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The report pointed to “a continued rise in vacancies, slower rent growth, and increased borrowing costs” and that “pressures on borrowers have led to increased delinquencies, loan losses, and provision expenses for banks.” Office properties are under the most stress, but multifamily risks have “also emerged.”
None of this is new. But there is a novel dynamic because the Biden Administration is over on January 20, 2025.
Even if there were more time, it’s unclear whether the administration could do anything to change the current dynamics. The problems have been long in development and there are no short-term solutions. Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence, said bank stress might be overstated and conditions have improved. At the peak of the problems, there were 577 financial institutions with elevated CRE concentrations. The number is now down to 446. Also, the most pressure is on the largest banks with the resources to make a loan on a high-rise office tower, but also with the resources to manage problems.
The incoming Trump administration may have a different focus on banking and the economy than the Biden one, but that is difficult to know. While Trump has spoken extensively about topics like tariffs and tax cuts, he’s said little to nothing about the state of CRE — ironic, as it has been his business for decades — and it’s difficult to know what he plans.
Banking oversight clearly needs to continue, although, with Trump’s emphasis on cutting costs, the regulatory agencies might get cut back and left unable to operate sufficiently if their budgets are heavily reduced. Or there might be a different emphasis on priorities, in which case it’s difficult to say exactly what will happen and how it might affect banking oversight and ultimately CRE lending.
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