On Thursday local time, US Treasury Secretary Yellen stated that the banking industry may feel pressure due to the weakening of commercial real estate valuations, but she does not believe that this will pose systemic risks to the US financial system.
Yellen attended a hearing of the Senate Banking Committee that day and told lawmakers that the risk exposure of large banks is "quite low," but smaller banks may be facing pressure related to high office vacancy rates, rising interest rates, and declining valuations.
She stated that it is clear that the banking industry will face pressure and there will be losses related to commercial real estate. "For some banks, this will be a major concern, but overall, the capital situation of the entire financial system is good." She pointed out that overall, the US financial system is healthy.
Recently, the stock price of New York Community Bank in the United States has plummeted one after another, due to its excessive exposure to commercial real estate credit, resulting in unavoidable losses, leading to regional banking crises once again becoming a hot topic in the financial field.
Rating agency Moody's downgraded the credit rating of New York Community Bank by two notches to "junk" on Tuesday, further hitting the already struggling bank. Moody's pointed out that community banks in New York face challenges in finance, risk management, and governance.
Since the collapse of Self Signing Bank, Silicon Valley Bank, and First Republic Bank in early 2023, bank investors have been in a state of anxiety. The decline in stocks has exacerbated a crisis of trust, ultimately leading to fatal deposit runs on these banks, which have large amounts of uninsured guaranteed deposits, a concentrated customer base, and a face loss in their bond investment portfolios.
The New York Community Bank attempted to assure investors on Wednesday that it has sufficient cash to sustain operations. But on Thursday, the stock price of New York Community Bank remained highly volatile, with a drop of over 9% during trading, indicating that the crisis was far from over.
On Tuesday, Yellen claimed that the combined effect of various factors will bring great pressure to commercial property owners, and she is concerned about this.
Although Yellen emphasized that she believes this issue is manageable, her banking regulatory authorities and the Financial Stability Supervision Commission are working closely with financial institutions to study how to meet the needs of borrowers. But her speech did not appease the market, but instead deepened investor concerns.
The economic situation is very good
On Thursday, in addition to discussing banking issues, Yellen also analyzed the health of the US economy. Yellen believed that the US economy performed better than other major economies around the world, emphasizing that inflation is slowing while wages continue to rise.
She said that commodity prices are no longer rising rapidly, and wage increases exceeding inflation mean that Americans can use more funds for savings in addition to daily consumption.
Yellen pointed out that recent surveys on consumer confidence have shown that Americans' attitudes towards the economy and their own financial situation have been improving, especially in the context of slowing inflation.
She said, "Sometimes, when people are asked about their economic situation and other people's performance, they seem to be more negative, but their evaluation of their own situation and behavior is more positive in terms of consumption or entrepreneurship."