Policymakers are bracing for a fresh wave of post-pandemic economic pain. The troubles at New York Community Bancorp. are focusing Washington’s attention on commercial real estate risks that have been looming for years, as businesses vacate office space, landlords lose rental income and banks take a hit from bad loans. Higher interest rates make it worse. While NYCB appears to be stable, Treasury Secretary Janet Yellen and lawmakers who spoke with MM this week are signaling the potential for broader fallout. The Financial Stability Oversight Council, a panel of top regulators led by Yellen, recently flagged commercial real estate in its annual report as a top financial risk. The Congressional Research Service also released a pair of reports late last year on bank exposures and potential macroeconomic stress. Banks hold an estimated $3 trillion in CRE loans, accounting for about half of the total market. "I hope and believe it will not end up being a systemic risk to the banking system,” Yellen told the Senate Banking Committee Thursday. “Exposure of the largest banks is quite low. But there may be smaller banks that are stressed by these developments." Lawmakers who have been tracking the issue frame it as a kind of slow-motion catastrophe – an inevitable economic problem building for years on post-Covid supply and demand dynamics. “It’s not a state secret that commercial real estate, particularly office, is a ticking time bomb within the banking system and could trigger a second wave of bank failures,” Rep. Ritchie Torres, a New York Democrat, told MM. “We should do everything we can to prevent it.” He raised the issue with Yellen on Tuesday. “There’s a lot of froth in the water,” said Sen. Thom Tillis, a North Carolina Republican on the Banking Committee. “My guess is we’re going to see a couple of failures or resets at banks that are heavily biased in their commercial real estate portfolio.” Tillis warned against conflating the current situation with last March’s banking failures. He said there’s “a broader base of risk out there.” “You just have to go out and take a look at the banking industry,” he said. “The ones that are biased in commercial real estate, they're all going to go through some challenges. Some of them have already hedged against it, but not all of them." The question now, he said, is “how can it be eased.” (He’s not sure what Congress can do.) Happy Friday — What do you think? Send thoughts and tips to zwarmbrodt@politico.com.
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