US Fed conducting stress tests with a commercial real-estate analysis that could lead to central bank action, Quarles says

The US Federal Reserve’s current stress tests on the largest banks include an assessment of the potential effect of the pandemic on commercial real estate, the central bank’s top regulator said, responding to lawmakers’ urgent concerns about a possible chain reaction from collapses in that sector.

Randal Quarles, the vice chairman for supervision, said the Fed is “absolutely” prepared to intervene if stress-test results — due before the end of June — show the need for action.

“The tests will include sensitivity analyses that will take into account projections of possible outcomes of the current event, both with respect to commercial real estate losses as well as a broad variety of other potential losses in existing assets and new assets that may come on,” he told a House Financial Services subcommittee.

Quarles added: “While there’s a great deal of uncertainty around that, we owe it to the country to make the most granular, data-driven analysis we can of the current resilience of the financial industry in light of the potential outcomes of this event, and then make decisions based on that.”

Democratic lawmaker

He was responding to questions raised by both a Democratic and a Republican lawmaker on the subcommittee on consumer protection and financial institutions.

“There are a whole bunch of restaurants, a whole bunch of hotels, a whole bunch of retailers that are going to fail and there’s no amount of getting around that,” said Representative Denny Heck, a Washington Democrat.

He continued: “When they do, those tenants are going to have to stop paying property owners. When they do, the property owners are going to have a difficult time paying banks. When that happens, when the situation at banks becomes more difficult, people that are the most vulnerable and at highest risk to banks are likeliest to be first victims.”

“We are going to have severe stress in this part of the economy,” Heck said.

Republican lawmaker

Heck echoed worries raised earlier in the hearing by Representative Andy Barr, a Kentucky Republican.

“I’m a little concerned about what I’m hearing in commercial real estate, especially retail and shopping centers,” Barr said.

Barr added that none of the current US assistance programs are intended to support rent payments, creating “pressure” on commercial retail estate owners.

Stress tests, like those being conducted now on the largest banks, are performed regularly to determine if the institutions have adequate capital and liquidity to absorb economic shocks.

Regulators including Quarles have said banks are well-equipped to cope with financial crises due to Dodd-Frank Act rules instituted after the 2008-2009 crisis.

However, the Trump administration and the Republican-controlled Congress between 2017 and 2019 dialed back these rules, including those involving stress tests.