Jerome Powell is predicting that more small banks will likely close or merge due to commercial real estate weaknesses, but that the problem is ultimately "manageable"

Jerome Powell is predicting that more small banks will likely close or merge due to commercial real estate weaknesses, but that the problem is ultimately "manageable."


Federal Reserve Chair Jerome Powell anticipates that more small banks may shutter or consolidate due to weaknesses in commercial real estate, yet he views the issue as "manageable," as he stated during a "60 Minutes" interview aired on Sunday night. This marked Powell's initial remarks on the sector since a recent upheaval affecting the stocks of numerous regional banks.

"I don't see much risk of a repeat of 2008," Powell remarked, alluding to the financial crisis of 16 years ago, which led to the downfall of major Wall Street institutions and hundreds of banks nationwide. "I believe it's a manageable problem," he added.

The recent concerns surrounding regional banks stemmed from New York Community Bancorp (NYCB), a $116 billion commercial real estate lender, which surprised Wall Street last Wednesday by reducing its dividend, reporting an unexpected quarterly loss, and setting aside funds for potential loan losses linked to commercial real estate assets.

Following this development, shares of the Hicksville, N.Y.-based lender plummeted by 38% on Wednesday and another 11% on Thursday, subsequently affecting the rest of the sector. Although stocks rebounded on Friday, they declined again on Monday as New York Community Bancorp dropped by over 10%.

Powell conceded in his "60 Minutes" interview that some smaller banks might need to be closed or merged due to losses associated with the diminished values of properties across the US, resulting from the Fed's heightened interest rates and the pandemic's impact, which led to vacancies in numerous city-center buildings.

"We recognize that certain smaller and regional banks with concentrated exposures in these areas face challenges," Powell stated. "This is something we've been cognizant of for quite some time, and we're collaborating with them to ensure they have the necessary resources and strategies to navigate through anticipated losses."

Regional banks are particularly susceptible as they hold a higher proportion of exposure to these properties compared to larger counterparts. For banks with assets exceeding $100 billion, commercial real estate loans constitute only 13% of total credit, while for smaller banks, they represent 44%.

Loans linked to offices and specific multifamily housing properties are exhibiting the most vulnerability, although not all segments of commercial real estate are expected to encounter similar issues.

Meanwhile, demand for commercial real estate loans from US banks weakened in the fourth quarter of 2023 as bank officers tightened their standards, as per a new Fed report released Monday. These officers anticipate continued tight standards in 2024 across all loan categories except for residential real estate.

David Chiaverini, a regional and midsized bank analyst for Wedbush Securities, expressed that commercial real estate "will be managed better at some of the other banks" than at New York Community Bancorp, emphasizing the latter's high exposure to rent-controlled apartment complexes in New York City, accounting for 22% of its loans.

Chiaverini suggested that the severity of the issue primarily pertains to New York Community Bank due to inadequate reserves relative to the risks in its portfolio. He also mentioned the possibility of a "perfect storm" affecting the industry if inflation rises, prompting the Fed to maintain higher rates for an extended period while the US economy enters a recession, which could lead to difficulties for borrowers in repaying loans.

Nonetheless, if such scenarios do not materialize, Chiaverini believes that the commercial real estate challenges should be "manageable" for banks. Powell echoed this sentiment during his "60 Minutes" interview, reiterating the term "manageable" three times. "It should be manageable," Powell emphasized.