“Higher-for-longer” interest rates are set to weigh on US lenders in the short term, according to the US Federal Reserve’s vice-chair for supervision Michael Barr, with exposure to commercial real estate a particular area of concern.
“Managing liquidity risk, interest rate risk and funding costs, I think are going to be challenging,” Barr said at this week’s Regional State Member Bank Director and Executive Conference, hosted by the Dallas Fed.
It also means that deposit betas may continue to be higher, Barr said, referring to the proportion of a change in the Fed funds rate that is passed on to deposit rates.
As higher-for-longer interest rates persist, banks exposed to commercial real estate likely have two main areas of concern, Barr added.
“One is vacancy rates, given the persistence of work[ing] from home [...] and also the repricing risk, as properties move from a very low rate environment to an elevated rate environment.”
“There is difficulty that those deals will no longer pencil out. I expect that banks are going to have to navigate both those kinds of risks going forward,” Barr said.
The US commercial property market is the midst of its biggest slowdown since the global financial crisis.
“Adverse effects on valuations from higher interest rates and structural decline in demand for office and retail space may trigger broader impacts given bank and non-bank lenders’ material balance sheet exposure to the sector,” said UBS in a recent report.
The Fed earlier this month held its benchmark policy rate at 5.25-5.50 per cent, its highest level for two decades, in place since last July. Minutes of this month’s Federal Open Market Committee meeting suggest that some officials were prepared to raise rates further if inflation “became more aggressive”, the Financial Times reported.
“We need to see more evidence of continued progress on inflation for us to be in a position where we can think about adjusting policy,” Barr said. “We need to sit tight where we are for longer than we previously thought.”
