Barr: Banking system healthy despite CRE downturn

Michael Barr, Federal Reserve Vice Chair for Supervision, delivers a speech on monetary policy and bank regulation on Feb. 14 at the 40th Annual National Association for Business Economics Economic Policy Conference, Washington, D.C.

The banking system remains strong despite the recent downturn of New York Community Bank and commercial real estate woes in larger markets, Federal Reserve Gov. Michael Barr said Feb. 14 during an economics policy conference in Washington, D.C,

Barr’s comments came a couple of weeks after New York Community Bancorp’s stock position fell significantly as investors feared that the Federal Reserve’s delays to interest rate cuts could worsen the bank’s challenges from its exposure to the stressed CRE market. On Jan. 31, NYCB announced a net loss of $252 million in the fourth quarter of 2024, compared to $172 million in net income the year prior. Dividends were cut to 5 cents per share from 17 cents. 

Though the bank’s share prices have since improved, those who acquired NYCB securities between March 2023 and Jan. 30 filed a class-action lawsuit alleging that NYCB committed securities fraud. The complaint, filed Feb. 7, alleged that NYCB didn’t disclose that it was seeing higher net charge-offs and deterioration in its office portfolio. 

“A single bank missing its revenue expectations and increasing its provisioning does not change the fact that the overall banking system is strong, and we see no signs of liquidity problems across the system,” Barr said. “Nevertheless, we continue to monitor conditions carefully across the sector, just as we always do.” 

Banks have reduced their reliance on held-to-maturity securities for liquidity purposes in the year following the March 2023 failure of Silicon Valley Bank, Barr said. They have also changed the composition of their high-quality liquid asset portfolios and strengthened their ability to use different sources of liquidity, he noted.  

“They have also been updating their contingency funding plans,” Barr added. “These improved practices are important for both individual firm resilience and aggregate financial stability.”  

The banking system is in a better position than a year ago and is well-positioned to absorb a high level of losses, added Kirk Hovde, managing principal of Inverness, Ill.-based Hovde Group. Also, chargeoffs and nonperforming assets remain low. Hovde called the New York Community Bancorp downturn “a sporadic event” that does not reflect the community banking environment, especially because NYCB had much exposure to rent-controlled multifamily apartments. Smaller banks also have far fewer CRE holdings in larger cities than regional institutions.  

Despite Barr’s positive view of banking conditions, he is also focusing on improving bank readiness to use the Fed’s discount window, which provides banks with liquidity when other forms of market funding come under strain. Late last year, Barr said banks must have sufficient self-insurance and discount window preparedness for any potential market stressors. He sees the deposit window as a crucial tool for financial stability, especially as the proliferation of digital banking and social media raises the risk of rapid bank runs. 

“Banks should do some preparation to be fully ready to tap the window,” Barr noted. “While banks do their part to get operationally ready, we at the Federal Reserve also need to continue to improve discount window operations.”