(Bloomberg) — US regulators are “closely focused” on risks in commercial real estate loans, and have stepped up downgrades of supervisory ratings on lenders amid new strains on their finances, according to the Federal Reserve’s chief bank watchdog.
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Supervisors are looking at what banks are doing to mitigate potential losses, how they are reporting risks to their boards and senior management, and whether they have enough reserves and capital to handle CRE loan losses, said Michael Barr, the Fed’s vice chair for supervision, in remarks Friday at Columbia University in New York.
“For a small number of banks with a risk profile that could result in funding pressures for the firm, supervisors are continuously monitoring these firms,” Barr said.
Regulators are tightening scrutiny after turmoil that felled three big regional lenders a year ago, while preparing a new round of international standards that have faced pushback from the industry. With more office and apartment buildings headed for distress, the central bank issued guidelines on Thursday for its annual stress tests that put extra emphasis on identifying risks in commercial property.
Read More: Fed Expands Calamities for Banks in Annual Stress Test After SVB
Barr cited concern about the impact on banks from the changing economic, interest-rate and financial situations.
“Because of the heightened risk environment and heightened supervisory attention, the Federal Reserve has issued more supervisory findings and downgraded firms’ supervisory ratings at a higher rate in the past year,” Barr said. “In addition, we have increased our issuance of enforcement actions.”
Barr is leading efforts to upgrade oversight after criticism by the Fed’s inspector general that followed the failure of Silicon Valley Bank a year ago. The approach that supervisors use for mid-size bank examinations “did not evolve with SVB’s growth and increased complexity,” and didn’t effectively transition the firm to the process used to examine large banks, according to the inspector general.
The Fed also has taken heat for the number of bank examiners who’ve left and other woes with front-line supervisory staff.
Read More: Bank Examiner Exits Risk Undermining Regulators’ Post-SVB Fixes
Barr said the Fed is looking to improve the speed, force and agility of its supervision to match the risks, size and complexity of the banks it oversees. Meanwhile, he said, as a regional bank gets bigger and more complex, there’s an expectation that its executives should also scale up their ability to manage the firm’s risk along the way.
“The goal is that the transition to heightened supervision for fast-growing banks is more of a gradual slope and not a cliff,” he said.
Banks still have mark-to-market losses on securities they hold due to higher interest rates, Barr said. That’s the same issue that led to SVB’s downfall. Other lurking concerns he cited include cybersecurity and the potential that artificial intelligence might be used to attack the banking system.
Read More: Dozens of Banks Rapidly Piled Up Commercial Property Loans
Commercial real estate isn’t all the same and it’s not all bad, Barr said. Some cities are doing better than others, he noted, and even within a given city, some high-end properties and buildings are faring better than others.
“So supervisors are looking under the hood” at the variety of CRE risks, Barr said. “We’re really looking at a very granular level.”
(Updates with additional details of Fed supervision, starting in the eleventh paragraph.)
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