Fed’s Barr Says Regulators Eyeing CRE Risk, Downgrade More Banks

(Bloomberg) — US regulators are “closely focused” on risks in commercial real estate loans, and have stepped up downgrades of lenders’ supervisory ratings amid new strains on their finances, according to the Federal Reserve’s chief bank watchdog.

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 prepared remarks Friday at Columbia University in New York.

Regulators are looking to improve supervision after turmoil that felled three big regional lenders a year ago, while preparing a new round of international standards that has 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 environment.

“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 his remarks. “In addition, we have increased our issuance of enforcement actions.”

Barr’s efforts to tighten scrutiny come after the Fed faced criticism by its inspector general in the wake of the failure of Silicon Valley Bank a year ago. Supervisors’ mid-size bank examination approach as applied to SVB “did not evolve with SVB’s growth and increased complexity,” and did not effectively transition the firm to the large bank examination process, according to the inspector general office.

The Fed has also faced criticisms for the number of exits of bank examiners and other woes with front-line supervisory staff.