US Banks Facing ‘False Sense of Comfort’ Amid Rising Signs of Credit Stress, Says Banking Regulator

Acting Comptroller of the Currency Michael J. Hsu just issued a fresh warning about potential risks to the US banking system.

In a new statement from the Office of the Comptroller of the Currency (OCC), Hsu says that banks should be “on the balls of their feet” with regards to risk management as credit markets begin to weaken.

Says Hsu,

“This means banks should be:

• guarding against a false sense of comfort from the recent relative stability in bank markets and from the benign credit performance data over the course of the pandemic,
• re-evaluating exposures, especially asset and liability concentrations, across a range of scenarios,
• taking actions to preserve capital and maintain strong liquidity consistent with each bank’s risk profile,
• maintaining discipline and strong risk management across all risk areas, not just in response to headlines, and
• preparing to communicate clearly, credibly, and promptly about their condition and risk profile should questions arise from customers, investors, depositors, and other stakeholders.” 

Hsu, who also served in the Federal Reserve Board of Governors, says signs of stress are appearing in credit markets, particularly commercial real estate.

“Credit risk in aggregate remains moderate, but signs of stress are increasing, for instance in consumer credit and certain segments of commercial real estate. Operational risk is elevated, as cyber threats persist, and the digitalization of banking products and services expands.”

In the latest quarterly report from the New York Fed on household debt and credit, Statista a “faster-than-usual” ascent in consumer debt was recorded, largely due to the surge in the volume of mortgage originations.

Billionaire real estate entrepreneur Jeff Greene also a warning that rising interest rates could cause significant damage to investors and US banks.

“I can tell you that most people in the market today have not been around that long. And you know since we had the dotcom bust in 2002, we’ve had artificially depressed interest rates. So people have never had this experience of rates going up. And I can tell you, I see people all the time who are panicked because they’re thinking, how am I going to pay off my construction loan when the apartment building I’m building is done, when rates have now gone up way beyond what I can afford and rents are dropping?

And so I think you’re going to have not just office buildings, people aren’t going to be able to afford to pay off their home loans that are due or their apartment building loans.

We are heading into a very frightening time in the entire real estate industry.”