(Adds details, quotes)
WASHINGTON Oct 14 The financial system remains
fragile and bank exposures to a deteriorating commercial real
estate sector present a trouble spot, U.S. Federal Reserve
Board Governor Daniel Tarullo said on Wednesday.
"While there have been some positive signals of late, the
financial system remains fragile and key trouble spots remain,"
such as commercial real estate, he told a Senate Banking
"Prices for both existing commercial properties and for
land ... have declined sharply in the first half of this year,
suggesting that banks are vulnerable to significant further
deterioration in their CRE loans," Tarullo said.
He said the economy appears to have resumed growing but
warned that it will take time to rebound from the serious
financial crisis it endured and jobs won't come back quickly.
"The unemployment rate has continued to rise, reaching 9.8
percent in September, and is unlikely to improve materially for
some time," he said.
Tarullo zeroed in on potential losses the banking system
faces on soured commercial real estate loans and said some were
slow to even acknowledge the weakening sector.
Prices for existing commercial properties have fallen 35 to
40 percent since peaking in 2007 and more declines are
anticipated. Rising job losses and high vacancy rates also are
weakening demand for commercial property, Tarullo said.
"The negative fundamentals in the commercial real estate
property markets have caused a sharp deterioration in the
credit performance of loans in banks' portfolios and loans in
commercial mortgage-backed securities," he said.
At the end of the second quarter, about 9 percent of
commercial real estate loans were delinquent, nearly double the
level a year earlier.
Tarullo said the Fed -- the U.S. central bank -- was
developing guidelines to encourage banks to restructure
commercial real estate loans and offer "workouts" for troubled
In the meantime, he said, Fed examiners are seeing
instances where banks are slow to acknowledge declines in cash
flows from commercial real estate properties and it wants to
find ways to encourage banks to offer "prudent" workouts to
(Reporting by Glenn Somerville; Editing by James Dalgleish)