MNI: Fed’s Cook Says Watching CRE Risks, Household Credit

Federal Reserve officials are keeping a close eye on an array of possible threats to financial stability ranging from losses in commercial real estate to deteriorating household credit conditions, but the current risk outlook appears manageable, Fed Governor Lisa Cook said Wednesday.

Cook said Fed supervisors are particularly focused on the large exposure of smaller regional banks to CRE, noting such loans account for about 5% of assets at large banks but as much as 30% for smaller ones.

“Those high concentrations have caused us to step up our supervisory work with community and regional banks that have significant CRE concentrations and to augment our regulatory data for this sector,” she said, highlighting last year's banking turmoil.

“All told, I view CRE risks currently as sizable but manageable, and I will be paying close attention to the sector in the short and medium run.”

INCREASING BORROWER STRESS

Household balance sheets remain in a strong position against the backdrop of a robust economy, but Cook said she is watching rising delinquency rates on credit cards and auto loans.

“They imply increasing household borrower stress, especially among some lower- and moderate-income households,” said Cook, who chairs the Fed Board’s Committee on Financial Stability, in prepared remarks to an event at the Brookings Institution.

As for the business sector, companies have accumulated more debt relative to GDP compared to other periods in history, Cook said.

“Despite this, most firms still have ample earnings to cover their scheduled interest and principal payments. This solid position reflects resilient earnings and the fact that firms with access to bond markets locked in long-term funding during the low interest rate environment of 2020 and 2021,” she said. “As a result, most firms also appear, in broad terms, resilient to potential adverse shocks.”

Cook also flagged the growth of private credit an ongoing threats on cybersecurity as key areas of attention for policymakers. (See MNI INTERVIEW: Reforms To Aid Treasury Market Resilience-SEC's Ghamami)