Bank Regulators: Real Estate Loans Biggest Concern

FILE - In this April 27, 2009 file photo, Sheila Bair, Chairman of the Federal Deposit Insurance...

FILE - In this April 27, 2009 file photo, Sheila Bair, Chairman of the Federal Deposit Insurance Corporation, listens to a question after speaking at the Economic Club of New York, in New York. The smaller, community banks are especially exposed to commercial real estate loans, which now pose the biggest challenge for many financial institutions and their overseers, Federal Deposit Insurance Corp. Chairman Sheila Bair told lawmakers at a Senate hearing Wednesday Oct. 14, 2009. (AP Photo/Mark Lennihan, File)

(AP)

With regulators warning that rising losses on commercial real estate loans pose risks for U.S. banks, senators asked Wednesday for greater attention to be focused on vulnerable smaller banks.

The smaller, community banks are especially exposed to commercial real estate loans, which now pose the biggest challenge for many financial institutions and their overseers, Federal Deposit Insurance Corp. Chairman Sheila Bair told lawmakers at a Senate hearing.

A year after the financial crisis struck with force, the stability of the banking system has improved but remains fragile, and commercial real estate lending is a key trouble spot, said Federal Reserve Gov. Daniel Tarullo.

With more than 7 million U.S. jobs lost in the recession, office space has sat empty and developers have defaulted on their loans. Nearly $500 billion in commercial real estate loans are expected to come due annually over the next few years.

The Fed and the other federal bank regulators are developing guidelines for banks' modifications of troubled commercial real-estate loans that will call for banks to accurately account for their losses on the loans, Tarullo said. The principle that modifying loans is "often in the best interest of both the financial institution and the borrower" will be part of the guidelines, he said.

Bair said she has been discussing with Treasury Department officials the possibility of giving community banks greater access to federal funds under the $700 billion financial bailout program — which benefited mostly big Wall Street institutions. Officials have been weighing a fresh round of bailouts for banks that were deemed to risky to qualify for earlier aid.

Sen. Tim Johnson, D-S.D., chairman of the Senate Banking subcommittee on financial institutions, said he was "concerned about the lending environment, particularly for small businesses" and about smaller banks that remain vulnerable to borrowers' risky levels of debt.