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Fed’s Foley Says Banks Face Losses on Declining Real Estate

Falling property prices are a renewed threat to banks engaged in mortgage, home-equity and commercial real-estate lending, said Michael R. Foley, senior associate director in the Federal Reserve’s bank supervision division.

“With residential and commercial property values still under strain, heightened reserve levels at banks remain appropriate for these sectors, and we expect that banks will continue to incur losses due to ongoing weakness in real estate markets,” Foley said today in Washington, in testimony before a subcommittee of the Senate Banking Committee.

“Banks will need to take strong steps to ensure that losses are recognized in a timely manner, and that reserves and capital levels remain adequate,” he said.

Fed regulators are overhauling financial supervision after a nationwide 33 percent drop in home prices contributed to the failure of 367 banks since the start of 2008. Last year, Congress passed the Dodd-Frank Act, aimed at preventing a repeat of the financial crisis.

Foley said that Fed supervisors are “cognizant” that firms of all sizes say they are burdened by the Dodd-Frank Law, even though the law’s provisions are aimed primarily at banks with over $50 billion in assets.

Control Risk

“Smaller institutions, while still expected to adequately measure, monitor, and control risk in their organizations, will not necessarily need to incur additional costs, assuming existing risk management structures are sufficiently robust,” Foley said.

Senator Bob Corker of Tennessee, the senior Republican on the subcommittee, disputed the view that the regulations mainly fall on larger banks, saying “I know you mentioned that somehow or another this is tilted toward the large institutions. The fact is, that’s not the case.”

“What’s happened with the community banks is their back offices now are much, much, much larger and are getting larger just to deal with all the things that are in Dodd-Frank,” Corker said. “So I would say that your statement is just categorically untrue because larger institutions have the ability to absorb regulations in a much more efficient way.”

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