The number of so-called problem banks and bank failures will remain high for the next several quarters, and the economic recovery may not be as robust as in past cycles, a top U.S. bank regulator said on Wednesday.
Sheila Bair, chairman of the Federal Deposit Insurance Corp, said the most prominent area of risk for banks is their commercial real estate exposure. She said banking regulators will soon issue guidance on how banks can do workouts on commercial real estate (CRE) loans that will be in the best interest of the borrowers and the banks.
The ultimate scale of losses in the CRE loan portfolio will very much depend on the pace of recovery in the U.S. economy and financial markets during that time, Bair said in prepared remarks to be delivered before a Senate banking subcommittee.
Bair struck a cautious tone in her testimony, saying that the recovery of the banking system will lag a bounce back in the overall economy.
She also noted that the size of the household wealth loss was so historically high and wide that the general economy could take a while to repair.
While we are encouraged by recent indications of the beginnings of an economic recovery, growth may still lag behind historical norms, Bair said.
She said banks have come far in recognizing losses on bad loans and repairing their balance sheet, and that the process will continue into next year.
But she also pushed for policymakers to start thinking about exit strategies for the government's extraordinary interventions into financial markets.
While these programs have played an important role in mitigating the liquidity crisis that emerged at that time, it is important that they be rolled back in a timely manner once financial market activity returns to normal, she said. (Reporting by Karey Wutkowski; Editing by Andrea Ricci)