Former US Treasury Secretary Lawrence Summers said that it is correct for the Federal Reserve and other institutions to investigate financial risks related to commercial real estate; this is more important in the short term than considering raising the capital standards of large banks.
“Regulators are right to be concerned about commercial real estate,” Summers said. “The banking industry's long-standing problem is that it doesn't pay attention to the market value of assets.” This is “a particularly prominent problem in the commercial real estate sector because this market is not always a highly liquid market,” he said.
The Federal Reserve's vice chairman for regulatory affairs Michael Barr said earlier on Friday that regulators are closely monitoring commercial real estate loan risks and have increased the “regulatory rating” of the banks in question. Barr is also responsible for encouraging major US banks to increase capital provisions, and last year announced a plan requiring banks to increase capital provisions by nearly 20%.
“The central bank is focusing on the problems in banks' real estate asset portfolios, which is more meaningful than focusing on abstract, politically-driven topics about the different capital requirements of large banks,” said Summers, a professor at Harvard University.
He said that although capital rules for large institutions are an important topic, they are less urgent than evaluating banks' commercial real estate portfolios.