Two officials from the U.S. Federal Reserve issued strong signals this week that the central bank is very concerned over the banking industry's exposure to commercial real estate loans and considers it to be a major stumbling block to the road to economic recovery.
In a speech Monday assessing the state of the U.S. economic recovery, Federal Reserve Bank of New York President and CEO William Dudley said he expects that "more pain lies ahead" for the commercial real estate sector and for banks with heavy exposure to CRE loans.
"The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending," Dudley said in the speech at the Fordham Corporate Law Center in New York.
Unemployment remains much too high and "it seems the recovery will be less robust than desired," with "significant excess slack" in the economy, Dudley said. Also, in something of a departure from recent Fed pronouncements, Dudley said the economy faces "meaningful downside risks to inflation over the next year or two."
Additionally, on Wednesday, The Wall Street Journal reported that a Fed official told banking industry regulators in a Sept. 29 presentation that "banks will be slow to recognize the severity of the loss" from commercial real estate loans, "just as they were in residential."
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