Boston Fed president says financial risks now coming from smaller banks

Boston Fed President Eric Rosengren said there are still financial stability concerns despite the fact that the nation’s biggest banks are healthier.

“There is a tendency to say large banks are well-capitalized and as a result we have no concerns,” Rosengren said in an interview with MarketWatch this weekend.

And yet, the first credit crunch happened in 1990 when a lot of small banks failed, he noted.

“It doesn’t have to be a large bank to fail to cause banking issues, to cause a problem” for the economy, he said.

Community banks have not raised their capital as much in relative terms as large banks and have taken on more risks, he said.

While the Fed’s stress tests have dissuaded large banks from expanding into commercial real estate in a big way, community banks, which don’t have stress tests, have expanded the amount of commercial real estate they’ve taken on, he said.

If the next downturn impacts commercial real estate, “I do have some concerns we could see clustering of community banks failing in a way that he had in the late 1980s or 1990s,” he said.

“We may not have the same kind of problem that we had in 2008, but it doesn’t mean we shouldn’t be concerned about it,” he said.

Rosengren said he regretted the fact that federal regulators don’t have the tools to change risky investor behavior.

“We don’t have a lot of tools to cause people to roll back what they’re doing,” the Boston Fed president said.

The only real “macroprudential tool” the Fed has is the countercyclical capital buffer, and that currently is set at zero, he noted.

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“We can talk about it, we can jawbone about it, but we don’t really have very many tools that can actually do something about it except to raise rates,” he said.

Rosengren said this was not an “ideal place to be…but until the U.S. adopts debt-to-income, loan-to-value, other financial stability tools, you are going to be putting a lot of weight on monetary policy,” he said.

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