WASHINGTON — Federal Deposit Insurance Corp. Chairman Martin Gruenberg flagged the slow pace of workers' return to offices as a credit risk to banks in a speech at the Institute of International Bankers conference in Washington D.C.
Banks that finance office spaces are facing a one-two punch from macroeconomic trends, Gruenberg said. Lower occupancy rates at offices should lower rents, and as interest rates rise, it's getting more expensive to refinance commercial real estate loans.
"The combination of lower operating income generated by office properties and a higher cost of financing, if they persist, would be expected to reduce valuations for these properties over time," Gruenberg said. "Some of the loans financing these properties are whole loans held on the balance sheets of banks, some are syndicated and sold, and many serve as collateral for [commercial mortgage-backed securities]. There are early indications that delinquencies on office property in [commercial mortgage-backed securities] are starting to tick up."
While the agency has previously
"There are early indications that delinquencies on office property in CMBS are starting to tick up," he said. "The good news is that these default rates remain low at this time."
Around $56 billion in loans financing properties that are collateral for CMBS are coming due in the next three years, out of a total $152 billion due by 2032, Gruenberg said. In major metropolitan areas, nearly 50% of those loans are going to mature in the next three years, he added.
"As the economy navigates towards a new normal with respect to remote and hybrid work, the question is whether the need for office space has been permanently and materially reduced," he said.
The Federal Reserve's policy on interest rates will likely have other consequences for banks. Gruenberg pointed to lingering risk in long-term maturity assets acquired when interest rates were lower. Unrealized losses, including securities that are available for sale or held to maturity, totaled about $620 billion at the end of 2022, he said.
"Unrealized losses weaken a bank's future ability to meet unexpected liquidity needs," Gruenberg said. "That is because the securities will generate less cash when sold than was originally anticipated, and because the sale often causes a reduction of regulatory capital."
Because banks are in a generally strong financial condition, they haven't had to realize these losses by selling depreciated securities, Gruenberg said. But in a rising interest rate environment, that could change.
Gruenberg also said that the interconnections between banks and nonbank financial firms "and the risk exposures in times of stress," are worthy of "urgent attention" by financial regulators, although he did not specify what nonbank firms he was referring to or what kinds of business arrangements he finds more problematic than others.
Acting Comptroller of the Currency Michael Hsu
