Policy Backgrounder : - Commercial Real Estate Concerns and Forthcoming Bank Regulations

• The combination of the expected losses on CRE loans, which are concentrated in midsize banks, and proposed rules that would extend stricter requirements to all banks larger than $100 billion in assets has the potential to reshape the nation’s financial services sector through consolidation and through greater activity shifting to less-regulated nonbanks. [...] The largest US banks as well as regional lenders have been building up reserves over much of the past year in anticipation of the turn in the commercial real estate market hitting their books. [...] Powell noted in his interview that regulators were “working with [banks] to make sure that they have the resources and a plan to work their way through the expected losses,” and that the Fed, FDIC, and Office of the Comptroller of the Currency (OCC) are “making changes steadily in supervision to make it more effective” and they were “working on proposals now on the regulatory side. [...] OCC’s proposal to extend requirements for long-term debt and total loss-absorbing capital to banks larger than $100 billion seeks to ensure that regional banks have adequate equity and “bail-in” debt to pass losses to investors and minimize the risk of a government bailout. [...] Even as new regulations may be issued that affect the sector, a combination of heightened standards for smaller and midsize banks, in addition to the expected losses those banks might take from their CRE portfolios, points to the potential for restructuring in the US financial services sector.