Some large regional and community banks that have built up unusually high concentrations in commercial real estate loans will be "particularly affected" by conditions in those markets, said Jon Greenlee, associate director of the Fed's Division of Banking Supervision and Regulation.
In the second quarter, said Greenlee, "Credit losses at banking organizations continued to rise, and banks face risks of sizable additional credit losses given the outlook for production and employment."
Greenlee's comments were in testimony prepared for delivery to a House of Representatives Oversight and Government Reform subcommittee.
"Poor loan quality, subpar earnings, and uncertainty about future conditions raise questions about capital adequacy for some institutions," he said.
While the stability of the banking system has improved, it is far from robust as banks face pressures from weakness in both residential and commercial property markets, Greenlee said.
Although year-on-year housing price price declines slowed in the second quarter, foreclosures and mortgage loss severities are likely to remain high, he said.
Delinquencies of mortgages backing commercial mortgage-backed securities have increased markedly in recent months and market participants anticipate the delinquency rates will rise by the end of the year, Greenlee said.
Fed examiners are noticing a sharp deterioration in loans in banks' portfolios and loans in commercial mortgage-backed securities, he said.
First Horizon loss narrowsHow Main Street banks get what they want
