CRE, Private Credit Risks “Manageable”: Fed’s Cook
Federal Reserve Board Governor Lisa D. Cook, who chairs the financial stability committee, highlighted commercial real estate (CRE), private credit, and cyber risks as key financial stability challenges while speaking at the Brookings Institution in Washington, D.C. on Wednesday.
Cook did, however, add that CRE and private credit funds appear to be well-positioned to properly manage these risks.
The CRE sector is still feeling the consequences of the pandemic and changes in how many people live, shop, and work, Cook said, according to a transcript of her speech.
These adjustments have had the greatest influence on office prices, while multifamily property values have fallen in the last year, according to Cook. Smaller banks have a high level of exposure to CRE loans, accounting for 30% of their assets. In response, the Fed has increased its supervision of these banks.
“All told, I view CRE risks currently as sizable but manageable, and I will be paying close attention to the sector in the short and medium run,” Cook said.
Cook noted private credit as a developing vulnerability. Private credit funds’ assets under management have expanded quickly in recent years, which may indicate “weak underwriting or excessive risk appetite,” she said.
According to Cook, these funds look to be well-positioned to manage those risks. They are, however, forming stronger relationships with traditional financial institutions, and an increasing number of banks are initiating their own private credit transactions.
“As a result, I will be monitoring the contribution of private credit to the overall leverage of the business sector and the evolving interconnectedness between private credit and the rest of the financial system,” Cook said.
Cook also addressed cyber risks, pointing out that criminal groups and foreign states are launching cyberattacks at a faster rate. She stated that financial resilience can lessen the impact of these attacks on the financial system.
“While strong capital and liquidity positions will not, by themselves, prevent an intrusion, they leave the affected institution in a better position to rejoin the system once the attack is resolved and, most importantly, promote confidence among its counterparties,” Cook said.
