(Bloomberg) -- The Federal Reserve’s Michael Barr warned that banks are likely to continue to face stress from the struggling commercial real estate sector for an extended period.

The vice chair for supervision said the overall banking system was “sound and resilient” and didn’t face the same kind of pressures that it did in March 2023, when Silicon Valley Bank and Signature Bank collapsed. However, he said empty office space remains an area of stress. 

“There are pockets of risks in the system,” Barr said at an event hosted by the National Community Reinvestment Coalition in Washington. “We’re looking at things like, what’s the level on unrealized losses on the balance sheet from securities? We’re looking at banks that have particular kinds of concentration in commercial real estate.”


Federal regulators last year pressed banks to take a sharper look at their exposures to debt on office buildings and other types of commercial real estate. Fed Chair Jerome Powell said last month that bad commercial real estate loans will probably lead to some bank failures, though they don’t pose a risk to the financial system.

The pandemic stressed commercial real estate markets in cities like San Francisco and New York as office employees worked remotely. Although a lot of workers have returned, many firms have hesitated to mandate five days a week in the office.

The Fed is focused on lenders that have exposure to office space in areas where significant price declines are expected, Barr said.

“This is the kind of thing where it’s likely to be a very slow-moving train as the financial sector and commercial real estate market move forward,” he said, adding that refinancing deals will play out in the next few years. “It’ll take some time.” 

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