FDIC Data Contradicts Fed Chair Powell: Shows Real Estate Problems Have Skyrocketed at Largest U.S. Banks, Not the Smaller Regionals

[Gunnar Larson]

https://wallstreetonparade.com/2024/03/fdic-data-contradicts-fed-chair-powell-shows-real-estate-problems-have-skyrocketed-at-largest-u-s-banks-not-the-smaller-regionals/


By Pam Martens and Russ Martens: March 11, 2024 ~

On Sunday, February 4, the CBS program 60 Minutes aired a taped interview
with Federal Reserve Chairman Jerome Powell. The actual interview had
occurred three days earlier and was conducted by 60 Minutes interviewer
Scott Pelley. Two noteworthy things happened in connection with that
interview: First, CBS did not indicate above the transcript of the
interview that Powell’s comments had been materially shortened in the
program that aired on TV; secondly, Powell calls the real estate problem at
the largest banks “manageable” while shifting the more serious real estate
loan problem to “smaller and regional banks.”

Below is what Powell had to say about problem real estate loans at U.S.
banks in the 60 Minutes’ interview. The bracketed bold text is what is in
the transcript but did not air in the broadcasted program on television.
(Scroll to 8 minutes and 20 seconds at this link to listen to the relevant
portion of the program that aired.)

PELLEY: The value of commercial office buildings all across the country is
dropping as people work from home. Those buildings support the balance
sheets of banks all across the country. What is the likelihood of another
real estate-led banking crisis?

POWELL: I don’t think that’s likely. [So, what’s happening is, as you point
out, we have work-from-home, and you have weakness in office real estate,
and also retail, downtown retail. You have some of that. And there will be
losses in that.] We looked at the larger banks’ balance sheets, and it
appears to be a manageable problem. There’s some smaller and regional banks
that have concentrated exposures in these areas that are challenged. And,
you know we’re working with them. [This is something we’ve been aware of
for, you know, a long time, and we’re working with them to make sure that
they have the resources and a plan to work their way through the expected
losses. There will be expected losses. It feels like a problem we’ll be
working on for years. It’s a sizable problem. I don’t think — it doesn’t
appear to have the makings of the kind of crisis things that we’ve seen
sometimes in the past, for example, with the global financial crisis.]

More recently, on March 7 of last week, Powell appeared before the Senate
Banking Committee to deliver his Semiannual Monetary Policy Report. In the
Q&A that followed, Senator Catherine Cortez Masto (D-NV) raised the
question with Powell on troubled real estate loans at U.S. banks. Cortez
Masto said this:

CORTEZ MASTO: The Financial Stability Oversight Council’s 2023 report
identified commercial real estate as a financial risk. And the Fed’s
monetary report also noted commercial real estate prices continue to
decline, especially in the office, retail, and multi-family sectors. I’m
especially concerned that because of the low levels of transactions in the
office sector, prices have not yet fully reflected the true decline in the
value. So can you expand on the emerging risk the Federal Reserve has
identified in the commercial real estate market – one – and then, I’m
curious, can you discuss the compound risks identified in commercial real
estate lending, particularly at banks with large CRE [Commercial Real
Estate] concentrations and high fractions of uninsured deposits.”

As part of his answer, Powell again played down the real estate threat at
the largest banks, stating: “There will be bank failures, but this is not
the big banks. If you look at the very big banks, this is not a first order
issue for any of the very large banks. It’s more smaller and medium size
banks that have these issues.” (Watch the full exchange between Cortez
Masto and Powell at one hour and 53 minutes (1:53) on the archived video
here.)

According to Senator Elizabeth Warren, Powell is leading the charge behind
the scenes to overturn federal regulators’ proposal to require the largest
banks to hold larger amounts of capital. Downplaying the large banks’ risks
from commercial real estate might be part of Powell’s overall agenda to gut
the proposed capital rule.

Powell has a long history of running interference for the mega banks on
Wall Street (those that have combined federally-insured deposits with
casino trading) and blaming the Fed’s serial and massive bailouts of these
global behemoths on fanciful causes. Nonetheless, we were shocked when the
Chair of the Federal Deposit Insurance Corporation (FDIC), Martin
Gruenberg, held a press conference at the exact time last week that Powell
was addressing the Senate Banking Committee. Gruenberg boldly announced a
serious real estate problem inside the largest banks. Gruenberg’s press
conference was to deliver the findings of the FDIC’s quarterly “Banking
Profile.” Gruenberg stated the following: (Go to 5 minutes and 12 seconds
at this link.)

GRUENBERG: “The increase in noncurrent loan balances was greatest among CRE
[Commercial Real Estate] loans and credit cards. Weak demand for office
space has softened property values and higher interest rates are affecting
credit quality and refinancing ability of office and other types of CRE
loans. As a result, the noncurrent rate for nonowner occupied CRE loans is
now at its highest level since first quarter of 2014, driven by portfolios
at the largest banks.” (Italic emphasis added.)

In fact, according to the chart above and accompanying data provided in an
Excel spreadsheet by the FDIC, past due loans on commercial real estate at
the largest banks (those with more than $250 billion in assets) as of
December 31 of last year are at 4.11 percent. That’s 1.66 percent higher
than at the end of the fourth quarter of 2008 when banks were exploding all
over Wall Street during the financial crisis. As the chart above indicates,
commercial real estate problems quickly became a lot worse at the largest
banks, with the past due rate reaching 7.97 by the end of the first quarter
of 2010.

That 4.11 percent past due rate at the biggest banks on December 31, 2023
compares with a past due rate of 1.35 percent at banks with $10 billion to
$250 billion in assets, according to the latest FDIC bank profile data.
Banks with $1 billion to $10 billion in assets have a negligible past due
rate of 0.64 percent.

The title of the FDIC chart above is “Bank Non-Owner Occupied, Nonfarm
Nonresidential Loan Past Due and Nonaccrual Rates.” The FDIC defines
nonfarm nonresidential commercial properties as follows:

“loans secured by real estate as evidenced by mortgages or other liens on
nonfarm nonresidential properties, including business and industrial
properties, hotels, motels, churches, hospitals, educational and charitable
institutions, dormitories, clubs, lodges, association buildings, ‘homes’
for aged persons and orphans, golf courses, recreational facilities, and
similar properties.”

The FDIC defines “nonaccrual” status as follows:

“Nonaccrual — For purposes of this schedule, an asset is to be reported as
being in nonaccrual status if: (1) it is maintained on a cash basis because
of deterioration in the financial condition of the borrower, (2) payment in
full of principal or interest is not expected, or (3) principal or interest
has been in default for a period of 90 days or more unless the asset is
both well secured and in the process of collection.”

The Fed is also doing something else related to growing losses at U.S.
banks that is deeply concerning. It has stopped providing the aggregated
quarterly data on the loan loss reserves at commercial banks – something it
had previously done quarterly since 1984. The Fed data charts now come up
with the words “DISCONTINUED.” (See here, here and here.) Our concern is
that the largest banks are woefully under-reserved for their potential real
estate losses.

According to a Federal Reserve chart, as of December 31, 2023, there were
only 13 banks in the U.S. with consolidated assets in excess of $250
billion.
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