Commercial Real Estate Risks Prompt Fed Oversight of Banks

The Fed is monitoring smaller banks’ commercial real estate loans, citing rising interest rates, stricter lending, and weaker property values.
Large banks passed stress tests, but regulators are watching for issues in capital planning and liquidity at Wall Street firms.
Supervisors are focusing on risks tied to private credit markets and bank ties to nonbank lenders.

Key Takeaways

CRE Under Scrutiny

Bloomberg reports that the Federal Reserve is warning of possible risks tied to commercial real estate, especially for community and regional banks. In a new report, the Fed pointed to high interest rates, strict loan standards, and falling values as key risks to these banks’ portfolios.

Refinancing Pressure Grows

Many property owners are struggling to refinance or repay loans, with office buildings facing the most pressure. The Fed is reviewing loan practices and banks’ credit loss reserves. It’s also tracking loan performance and signs of rising defaults.

Big Banks Still Strong

The Fed said large banks remain well capitalized. Recent stress tests showed they could handle a severe downturn and still lend to households and businesses. However, supervisors are watching for weaknesses in how these banks plan for capital and manage liquidity.

Focus on Key Risks

Vice Chair for Supervision Michelle Bowman said regulators should focus on real risks, not minor process issues. She has pushed for a more targeted approach to oversight.

Nonbank Lending a Concern

Regulators are also tracking how much traditional banks lend to nonbank firms. These companies are less regulated, and defaults in private credit markets have raised alarms. The Fed said it will continue to monitor these connections.

Recovery Plans Under Review

Supervisors are checking banks’ recovery plans to ensure they can respond quickly in a crisis. This includes how banks would keep core operations running and maintain funding under stress. These reviews are also sharpening attention on broader oversight practices, especially where regulatory gaps or inconsistent credentialing have come under fire in recent years.

Why It Matters

While big banks look stable, smaller lenders with high exposure to office loans face growing risks. The Fed’s focus shows concern that stress in the commercial real estate market could spread to the broader financial system.

What’s Next

Banks may need to tighten lending, build capital, and improve risk planning. The Fed will likely keep a close eye on commercial real estate and nonbank lending as economic uncertainty continues into 2026.