The pain of small and mid-sized banks isn’t over yet, according to Federal Reserve chair Jerome Powell.
Falling office values will harm more regional banks as a result of their ties to commercial real estate, Powell warned at a hearing on Thursday before the Senate Banking Committee reported by The Hill.
Office struggles affect downtown neighborhoods in cities, Powell noted, in turn affecting banks with loans out to retail assets in central business districts.
“This is a problem we’ll be working on for years more, I’m sure,” Powell said. “There will be bank failures.”
The Fed is working with banks to navigate challenges, Powell said, calling the situation “manageable.” The Fed chair also noted that very large banks don’t have as much to worry about compared to smaller counterparts.
While Powell didn’t detail how the Fed was assisting banks with concerning commercial real estate ties, he did say the regulator identified the banks carrying the most risk.
Powell’s forecast comes after regulators have been raising alarms about banks’ exposure to real estate in recent months, including the New York State Department of Financial Services warning in the fall of unrealized losses stemming from the rise of interest rates and exposure to the commercial sector.
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There have been 34 bank failures since 2015, according to the Federal Deposit Insurance Corp, including falls by institutions with strong ties to the real estate sector, including the demise of Signature Bank and Silicon Valley Bank.
Eyes are trained upon New York Community Bank, which disclosed this week that it recently lost $6 billion in deposits over a span of a few weeks. A plunge of its shares this week led the New York Stock Exchange to temporarily halt trading for NYCB, which promptly secured a $1 billion equity infusion from institutional investors, including former Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital.