Fed official says banks at risk over property loans

ATLANTA, Georgia (Reuters) - U.S. banks are at risk of sizable new loan losses, particularly on commercial property, and some banks may not have sufficient capital to fully cushion against setbacks, a Federal Reserve official said on Monday.

Some large regional and community banks that have built up unusually high concentrations in commercial real estate loans will be "particularly affected" by conditions in those markets, said Jon Greenlee, associate director of the Fed's Division of Banking Supervision and Regulation.

In the second quarter, said Greenlee, "Credit losses at banking organizations continued to rise, and banks face risks of sizable additional credit losses given the outlook for production and employment."

Greenlee's comments were in testimony to a House of Representatives Oversight and Government Reform subcommittee hearing being held in Atlanta to discuss how the collapse of housing and commercial property markets has affected the region.

"Poor loan quality, subpar earnings, and uncertainty about future conditions raise questions about capital adequacy for some institutions," he said.

U.S. banks were badly shaken by the financial crisis that began in the summer of 2007, and it has taken hundreds of billions of government dollars to bolster bank capital and keep the financial system from collapse.

Almost all of the largest remaining U.S. banks demonstrated in May during a government-mandated exercise that they had sufficient capital reserves to cushion against possible losses or could raise capital in private markets. Many smaller banks, however, have fared less well. Bank failures are at their highest level this year since 1992, with 115 banks having failed so far in 2009.

Federal Reserve officials have frequently pointed to risks from commercial property markets as a major concern for banks with substantial exposures, but Greenlee's assessment was particularly gloomy.

"Banking organizations continue to face significant challenges, and credit markets are far from fully healed," he said.

The U.S. economy grew in the third quarter for the first time in more than a year, but many economists expect unemployment, already at a 26-year high, to top 10 percent amid a tepid recovery.

Greenlee said that while the stability of the banking system has improved, it is far from robust as banks face pressures from weakness in both residential and commercial property markets.

Although year-on-year housing price price declines moderated in the second quarter, foreclosures and mortgage loss severities are likely to remain high, he said.

Delinquencies of mortgages backing commercial mortgage-backed securities have increased markedly in recent months and market participants anticipate the delinquency rates will rise by the end of the year, Greenlee said.

Fed examiners are noticing a sharp deterioration in loans in banks' portfolios and loans in commercial mortgage-backed securities, he said.

(Writing by Mark Felsenthal, Editing by Leslie Adler)