Summers Says CRE Is More ‘Urgent’ for Fed Than Capital Rules

(Bloomberg) — Former Treasury Secretary Lawrence Summers said the Federal Reserve and other agencies are right to be probing financial risks tied to commercial properties, saying this was a more important effort in the near term than its initiative to boost capital standards among big banks.

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“Regulators are right to be concerned about commercial real estate,” Summers said on Bloomberg Television’s Wall Street Week with David Westin. “The chronic problem in banking is a failure to pay attention to the market value of assets,” and that’s a “particularly pronounced problem with commercial real estate, where there isn’t always a liquid market for properties,” he said.

The Fed vice chair for supervision, Michael Barr, said earlier Friday regulators are “closely focused” on risks in commercial real estate loans, and have stepped up downgrades of supervisory ratings on lenders. Barr also is overseeing a push to force the biggest US lenders to increase the amount of capital they set aside, and last year unveiled a plan for an almost 20% boost.

“It would be much more productive for our central bank to be focused on the question of real estate portfolios in the banks they supervise” than “some of the more abstract and politically driven arguments about various kinds of capital charges on the largest banks,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV.

While capital rules for the largest institutions is an important debate, “it’s less urgent” than scrutinizing CRE portfolios at banks, he said.

Bank Consolidation

The former Treasury chief also said that challenges at smaller and mid-sized banking institutions could see some of them fail to remain going concerns. Credit flows to commercial property could shift from banks to securities markets, he also indicated.

“My sense is we’re going to need to prepare for consolidation in the banking sector, and quite possibly some even further evolution of lending away from banks, towards capital markets,” he said.

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