Commercial Real Estate Loans Probably “Biggest Threat” to Smaller Banks: Bernanke

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

Commercial real estate (CRE) loans are probably the “biggest threat” to smaller and regional banks at this time, Federal Reserve Board Chairman Ben Bernanke told Congress February 24, 2010.

Appearing before the House Financial Services Committee, Bernanke told members that CRE “remains probably the biggest credit issue that we still have.” The Fed Chairman said the central bank will be watching small and medium-sized banks “very carefully” in light of their exposure.

A day earlier Federal Deposit Insurance Corp. Chairman Sheila Bair predicted that bank failures in 2010 will exceed levels seen in 2009, heavily driven by CRE problems. She noted that CRE losses, which will likely peak in 2010, take time to work through the system.

Meanwhile, on the topic of transparency, Bernanke said the Fed would welcome a Government Accountability Office (GAO) review of its management of all emergency credit and liquidity facilities used during the financial crisis.

The Fed would also be prepared to support legislation requiring the release of the names of firms that participated in each special facility “after an appropriate delay.” Bernanke stressed that the delay would need to be long enough to ensure that investors did not view a firm’s use of the facilities as a possible sign of ongoing financial problems.

Bernanke has resisted calls for GAO audits of monetary policy decisions, and reiterated the need to insulate monetary policy decisions from short-term political pressures. He also stressed the need to maintain the confidentiality of discount window lending to individual depository institutions.