Yellen sees more commercial real estate stress, losses, but no systemic banking risk

By David Lawder

WASHINGTON (Reuters) - U.S. Treasury Secretary Janet Yellen said on Thursday that she expects additional bank stress and financial losses from weakness in the commercial real estate market but believes this will not pose a systemic risk to the banking system.

Yellen told a Senate Banking Committee hearing that bank regulators are working with banks to address risks caused by higher post-pandemic vacancy rates for many office buildings in larger cities, and higher interest rates for refinancing loans.

"Valuations are falling. And so it's obvious that there's going to be stress and losses that are associated with this," Yellen said.

"I hope and believe that this will not end up being a systemic risk to the banking system. The exposure of the largest banks is quite low, but there may be smaller banks that are stressed by these developments."

She did not directly address the stock-market sell-off experienced by New York Community Bancorp, which last week reported a surprise fourth-quarter loss after building bigger provisions for potential commercial real estate loan defaults.

The incident also has hit shares of some other regional U.S. banks as investors fear weak demand for offices could trigger a wave of defaults and pressure banks, which are hoping to avoid selling commercial real estate loans at significant discounts.

Yellen's testimony marks the second time this week that she sought to downplay the commercial real estate risks, telling the House Financial Services Committee on Tuesday that she was concerned about stresses in commercial real estate, but that the situation was manageable.

Yellen told senators that the multi-regulator Financial Stability Oversight Council has discussed commercial real estate risks at every meeting over the past year. "We have been looking at it in a comprehensive way and working with the bank supervisors to understand exposures."

Yellen also told the hearing she was concerned about the absence of affordable insurance in some U.S. markets due to rising climate change driven risks such as storms, floods and wildfires, adding that this could create a "feedback loop" that could threaten financial stability.

"The absence of insurance or being priced out of insurance as these climate risks have intensified, is harming the well-being of households on the cost of living, and it's also creating risks to financial stability because many banks have exposure to loans, to the risks that can come if there are uninsured losses," Yellen said.

She said Treasury's Federal Insurance Office is working on a survey to collect zip code-level data on trends and factors affecting the availability and pricing of insurance.

(Reporting by David Lawder; Editing by Bill Berkrot)