Economy

WASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen said on Thursday that she expects additional bank stress and financial losses from weakness in the commercial real estate market but believes this will not pose a systemic risk to the banking system.Yellen told a Senate Banking Committee hearing that bank regulators are working with banks to address risks caused by higher post-pandemic vacancy rates for many office buildings in larger cities, and higher interest rates for refinancing loans.”Valuations are falling. And so it’s obvious that there’s going to be stress and losses that are associated with this,” Yellen said.”I hope and believe that this will not end up being a systemic risk to the banking system. The exposure of the largest banks is quite low, but there may be smaller banks that are stressed by these developments.”She did not directly address the stock-market sell-off experienced by New York Community Bancorp (NYSE:NYCB), which last week reported a surprise fourth-quarter loss after building bigger provisions for potential commercial real estate loan defaults.The incident also has hit shares of some other regional U.S. banks as investors fear weak demand for offices could trigger a wave of defaults and pressure banks, which are hoping to avoid selling commercial real estate loans at significant discounts.Yellen’s testimony marks the second time this week that she sought to downplay the commercial real estate risks, telling the House Financial Services Committee on Tuesday that she was concerned about stresses in commercial real estate, but that the situation was manageable.Yellen told senators that the multi-regulator Financial Stability Oversight Council has discussed commercial real estate risks at every meeting over the past year. “We have been looking at it in a comprehensive way and working with the bank supervisors to understand exposures.”Yellen also told the hearing she was concerned about the absence of affordable insurance in some U.S. markets due to rising climate change driven risks such as storms, floods and wildfires, adding that this could create a “feedback loop” that could threaten financial stability.”The absence of insurance or being priced out of insurance as these climate risks have intensified, is harming the well-being of households on the cost of living, and it’s also creating risks to financial stability because many banks have exposure to loans, to the risks that can come if there are uninsured losses,” Yellen said.She said Treasury’s Federal Insurance Office is working on a survey to collect zip code-level data on trends and factors affecting the availability and pricing of insurance. More

WASHINGTON (Reuters) -A $95.34 billion bill that includes aid for Ukraine, Israel and Taiwan advanced in the U.S. Senate on Thursday after Republicans blocked compromise legislation that included a long-sought overhaul of immigration policy.Senators backed a procedural motion by 67-32, exceeding the 60-vote threshold to advance the bill. Seventeen Republicans voted in favor, in a surprising shift after they blocked the broader bill on Wednesday.”This is a good first step. This bill is essential for our national security, for the security of our friends in Ukraine, in Israel, for humanitarian aid for innocent civilians in Gaza, and for Taiwan,” Schumer said in the Senate after the vote.There was no immediate word on when the 100-member chamber would consider final passage, as some senators said they expected to remain in session during the weekend if necessary.”We are going to keep working on this bill until the job is done,” Schumer said.The Democratic-led Senate took up the security aid bill after Republicans on Wednesday blocked a broader measure that also included reforms of border security and immigration policy that a bipartisan group of senators had negotiated for months.The security aid bill includes $61 billion for Ukraine as it battles a Russian invasion, $14 billion for Israel in its war against Hamas and $4.83 billion to support partners in the Indo-Pacific, including Taiwan, and deter aggression by China.It also would provide $9.15 billion in humanitarian assistance to civilians in Gaza and the West Bank, Ukraine and other populations in conflict zones around the globe.The Senate is expected to take days to agree on a final version of the security aid package, with some Republicans continuing to push for amendments. Supporters of Ukraine have been struggling for much of the past year to find a way to send more money to help Ukrainian President Volodymyr Zelenskiy’s government. Even if the aid bill eventually passes the Senate, it faces uncertainty in the House of Representatives. Dozens of Republican House members, particularly those most closely allied with former President Donald Trump, have voted against Ukraine aid, including Speaker Mike Johnson.While lawmakers have approved more than $110 billion for Ukraine since Russia invaded in February 2022, Congress has not passed any major aid for Kyiv since Republicans took control of the House in January 2023.GLOBAL MESSAGESupporters of Ukraine aid say Washington and its partners must send a unified message to Russia as well as globally.U.S. allies agree. Polish Prime Minister Donald Tusk said on social media that Republican senators should be ashamed for blocking the Ukraine aid package, saying former President Ronald Reagan would be “turning in his grave.”The Kremlin said Putin and Chinese President Xi Jinping spoke by phone on Thursday and both rejected what they called U.S. interference in the affairs of other countries.Democratic Senator Chris Murphy, one of the three negotiators on the border deal, told Reuters the biggest potential risk to the Ukraine bill would be opposition by Trump.”Once he got loud on the immigration bill, the thing fell apart … if he turns his flamethrower on Ukraine, I wonder how it survives,” Murphy said in an interview on Wednesday.Trump, who leads in the race for the Republican presidential nomination, has called for de-escalation in Ukraine and said he would have the conflict resolved in 24 hours if he were reelected. He also has said he would ask Europe to reimburse the U.S. for money sent to Ukraine.Trump also pressed his fellow Republicans to reject any compromise on immigration. Tight control of the border is a feature of his campaign to try to defeat Democratic President Joe Biden in November. More

NEW YORK (Reuters) -Federal Reserve Bank of Richmond President Thomas Barkin said Thursday the central bank has time to decide what’s next for monetary policy while it waits for further assurance that inflation is indeed falling back to target.“I think it is smart for us to take our time,” Barkin said in a speech delivered to a gathering held by the Economic Club of New York. “No one wants inflation to reemerge,” the official said, “and given robust demand and a historically strong labor market, we have time to build that confidence before we begin the process of toggling rates down.”Barkin spoke in the wake of last week’s Federal Open Market Committee that saw policy makers hold their overnight interest rate target steady at between 5.25% and 5.5%. The Fed also opened the door toward lowering rates amid swiftly retreating inflation pressures. But in a press conference after the FOMC meeting, Fed Chairman Jerome Powell cautioned against expectations of an imminent cut in rates, putting financial markets under pressure. Barkin told reporters after his remarks that he doesn’t want to pre-judge the outcome of future Fed meetings and declined to say when he’d be ready to cut rates. But he did say it was important to see a broadening of the factors pulling down inflation to gain confidence price pressures are on a sustained trajectory back to 2%. In his speech, Barkin said inflation has appeared to be abating before popping higher again, which is why he wants to be sure inflation is truly heading back to 2% before calling for a change in policy. “I am hopeful but still looking for more conviction that the slowing of inflation is broadening and sustainable,” Barkin said. But he added, “much of the inflation drop thus far has come from the partial reversal of pandemic-era goods price increases. Shelter and other services inflation remain higher than historical levels.” Barkin also said a rebound in consumer sentiment, a willingness to spend by households even if it taps savings, joined with easier financial conditions “could also introduce risk to the inflation outlook.” “It’s possible that we will return to the pre-pandemic economy pretty seamlessly,” Barkin said. But, “it is also possible that the landing might be somewhat bumpier, with continued inflation pressure or demand challenges that we will need to counteract.” Barkin noted that it looks likely upcoming inflation data will continue to soften. He also said recent economic data has been “remarkable” for its strength. Barkin also noted that fears of recession among his contacts have fallen, saying firms are hiring less but also firing less, while seeing reduced space to raise prices. More

Bank tremors serve as a reminder: Just because a crisis hasn’t hit immediately doesn’t mean commercial real estate pain isn’t coming.Graceful Art Deco buildings towering above Chicago’s key business district report occupancy rates as low as 17 percent.A set of gleaming office towers in Denver that were full of tenants and worth $176 million in 2013 now sit largely empty and were last appraised at just $82 million, according to data provided by Trepp, a research firm that tracks real estate loans. Even famous Los Angeles buildings are fetching roughly half their prepandemic prices.From San Francisco to Washington, D.C., the story is the same. Office buildings remain stuck in a slow-burning crisis. Employees sent to work from home at the start of the pandemic have not fully returned, a situation that, combined with high interest rates, is wiping out value in a major class of commercial real estate. Prices on even higher-quality office properties have tumbled 35 percent from their early-2022 peak, based on data from Green Street, a real estate analytics firm.Those forces have put the banks that hold a big chunk of America’s commercial real estate debt in the hot seat — and analysts and even regulators have said the reckoning has yet to fully take hold. The question is not whether big losses are coming. It is whether they will prove to be a slow bleed or a panic-inducing wave.The past week brought a taste of the brewing problems when New York Community Bank’s stock plunged after the lender disclosed unexpected losses on real estate loans tied to both office and apartment buildings.So far “the headlines have moved faster than the actual stress,” said Lonnie Hendry, chief product officer at Trepp. “Banks are sitting on a bunch of unrealized losses. If that slow leak gets exposed, it could get released very quickly.”We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

LONDON (Reuters) – Global creditors and Moody’s (NYSE:MCO), Fitch and S&P Global Ratings met on Wednesday to discuss ratings agencies’ actions after debt relief provided by official creditors to some of the world’s poorest nations, a source said on Thursday. The meeting also discussed methodology on credit action in the event countries carry out a debt swap and in other debt situations, the source familiar with the situation added. The role of the agencies came into focus in 2020 when the economic fallout from COVID-19 pushed dozens of poor nations into debt distress. The Debt Service Suspension Initiative (DSSI) launched in April 2020 by the G20 group of nations allowed the temporary suspension of government-to-government debt payments for the poorest nations. However, countries that applied for relief were punished with downgrade warnings and negative statements from ratings agencies, which added to the poorest countries’ borrowing costs and riled governments.Although in theory only tasked with rating the commercial part of borrowing, the agencies cited the G20’s call for private sector creditors to participate in the initiative.The virtual meeting – which was held in three consecutive sessions with each ratings agency – was part of the Global Sovereign Debt Roundtable that brings together representatives from the International Monetary Fund (IMF), the World Bank and G20 to tackle issues surrounding sovereign debt. The roundtable was launched to tackle issues after countries that have tipped into default since 2020 struggled to make progress in their debt restructuring efforts. Spokespeople for Moody’s and S&P Global Ratings declined to comment. A spokesperson for Fitch did not immediately respond to a request for comment.The source, speaking on condition of anonymity, said the next technical meeting of the roundtable in March would revisit “Comparability of Treatment” (COT) issues in the hope of making progress on the issue ahead of the IMF World Bank Spring meetings in April.A principle from the Paris Club of wealthy creditor nations, COT aims to ensure its members do not give outsized concessions compared to private lenders or others outside the group. But a disagreement over how to asses this derailed Zambia’s debt restructuring deal with its bondholders in November.Wednesday’s gathering was attended by representatives from the Institute for International Finance, the International Capital Markets Association, financial firms BlackRock (NYSE:BLK) and Standard Chartered (OTC:SCBFF) as well as Zambia, Ethiopia, Ghana, Suriname, Sri Lanka, and Ecuador. More

Global investors expect falling prices in China to push down inflation rates worldwide this year, as excess capacity in its slowing economy prompts Chinese exporters to cut prices on goods they sell abroad.Prices of Chinese exports have been falling at their fastest rate since the 2008 financial crisis, indicating the world’s largest exporter is starting to send deflation outward to countries that have been battling high inflation.“China will be exporting deflation to the rest of the world, and you will find various countries dealing with the fact that China has built up overcapacity,” said Chetan Sehgal, lead portfolio manager at Templeton Emerging Markets Investment Trust, a UK-listed fund.China’s consumer prices fell at the fastest annual rate in 15 years in January, losing 0.8 per cent, while the country’s producer price index dropped 2.5 per cent year on year. Few economists expect developed economies to record similar outright falls in prices, but many think Chinese deflation could have a significant impact in emerging markets, particularly those with major trading relationships with Beijing.Citigroup analysts said this week that falling prices in China could help to hasten moves by central banks in emerging markets to cut interest rates this year, particularly in countries that consume relatively large shares of Chinese goods.“We as investors are only just starting to connect the dots” on how falling prices imported from China might play out across markets, said Luis Costa, global head of emerging markets sovereign debt strategy at Citigroup. “The question is the magnitude.”Low-cost Chinese-made goods have been a feature of global trade since Beijing joined the WTO in 2001. But weak domestic demand as a result of China’s prolonged property bust and a weaker renminbi are leading investors to forecast that exports could be an especially powerful force this year.The prospect of China exporting deflation matters for developing economies because “potentially, a big Chinese export boom in 2024 will lead to sustained demand for Latin American, African, Kazakh or Indonesian commodities”, said Charles Robertson, head of macro strategy at FIM Partners. “Chinese deflation in manufactured goods may still allow a little inflation in commodities.”Not all economists believe that deflationary forces coming out of China will have a significant impact on global prices.Helen Qiao and Miao Ouyang, Bank of America economists, said that Chinese export prices would be unlikely to influence significantly consumer prices in advanced economies. “For the US, we estimate the share of Chinese imports in the total US goods consumption is less than 5 per cent — and goods account for approximately 40 per cent of the US CPI basket,” they said.Stephen Stanley, chief US economist at Santander Bank, said that any impact was likely to be small. “The biggest deflationary force in goods prices here of late has been used vehicles, which has nothing to do with China,” he said. But some economists think that US imports from China are being undercounted, which could make the impact on prices greater than it might appear. In recent years for example, China’s trade data has been indicating that it exports tens of billions dollars more than the US assesses it imports, Brad Setser, a senior fellow at the Council on Foreign Relations, has noted.At the same time, cheaper Chinese exports will intensify complaints among western manufacturers about unfair competition. Chinese exports still face obstacles this year because they are “vulnerable to greater trade protectionism, with China’s recent gains in global market share starting to face growing pushback overseas”, said Capital Economics analysts on Thursday.“The most obvious headline threat is to developed markets — because China’s moving up the value-added curve into high-end manufacturing,” said Robertson.BYD, China’s biggest carmaker, recently announced price cuts of between 5 and 15 per cent for its electric vehicles in Germany, after Mercedes-Benz warned late last year that its profits were being hit by a “brutal” price war in electric vehicles.Nearly every other manufacturing company in Germany surveyed by the Bundesbank in the past year relied on Chinese supplies for critical intermediate inputs whether directly or indirectly, the central bank said in a report last month.“China spent 20 years destroying emerging-market competitors in the manufacturing space, or at least squeezing them out of global markets. Now it’s threatening to do the same to advanced economies’ manufacturers,” added Robertson.The US and EU are facing a difficult choice, Setser said, between policies to “de-risk” import reliance on China, and the economic forces that are driving cheap Chinese supply. But “in much of the rest of the world, the choice is simple”, he added. “If China is selling high quality — or acceptable quality — products at low prices, they are going to buy them.”  More

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Its stock has tumbled nearly 57% since it posted a surprise fourth-quarter loss last week due to provisions for loans tied to the CRE industry and cut its dividend to deal with tough regulations.The share slide has also spilled over to other regional banks, with the KBW Regional Banking Index declining 12% so far this year and 5.4% this month. NYCB’s newly appointed executive chairman Alessandro DiNello said on Wednesday that if needed the lender would shrink its balance sheet by selling non-core assets to bolster its common equity tier 1 ratio, a key measure of financial strength.Brokerage Morgan Stanley said it was “modeling a more aggressive balance sheet optimization”, with loans down 10% by the fourth quarter of fiscal 2024 and a more aggressive reserve build in the first half.’CHALLENGING OUTLOOK’ Since early 2023, the banking industry has struggling with potential loan losses related to CRE sector that has been reeling with high interest rates and lower office occupancy due to remote work.Investors fear weak demand for offices could trigger a wave of defaults and pressure banks, which are hoping to avoid selling CRE loans at significant discounts.DiNello said NYCB will consider the sale of loans in its CRE portfolio or allow them to run off the balance sheet naturally.Citi analysts said in a note that as the bank looks to build capital, the intermediate outlook is challenging with a 7% ROTCE, or annualized net income for common shareholders, and very low payout. More