The Fed Is on Bub­ble Watch

▶ The cen­tral bank sends a warn­ing to reck­less lenders ▶ “They’re erring on the side of stim­u­lus”

Bloomberg Businessweek (North America) - - Global Economics -

The Dec. 18 mes­sage from the Fed­eral Re­serve and two other gov­ern­ment agen­cies seemed in­nocu­ous enough. Posted on the Fed’s web­site, it “re­minded” fi­nan­cial in­sti­tu­tions about “ex­ist­ing reg­u­la­tory guidance on pru­dent risk man­age­ment prac­tices for com­mer­cial real es­tate lend­ing.”

That joint state­ment from the Fed, the Fed­eral De­posit In­sur­ance Corp., and the Of­fice of the Comptrolle­r of the Cur­rency (OCC), how­ever, was an im­por­tant warn­ing to banks across the U.S.: The com­mer­cial property mar­ket is heat­ing up in cities from Bos­ton to Dal­las to Seat­tle. As a re­sult, fed­eral reg­u­la­tors are on high alert for slack lend­ing stan­dards and un­healthy con­cen­tra­tions of loans in the in­dus­try.

Broad­cast­ing timely re­minders of risk is one of many reg­u­la­tory ap­proaches that fall un­der what’s called macro­pru­den­tial pol­icy. If the Fed uses it cor­rectly, it can steer lenders away from dan­ger zones with­out re­sort­ing to in­ter­est rate hikes. Tra­di­tional “pru­den­tial” reg­u­la­tion en­sures the safety of in­di­vid­ual banks. But types of loans that are safe when made by a sin­gle bank be­come dan­ger­ous when thou­sands of banks make them at the same time. That’s where macro­pru­den­tial su­per­vi­sion is sup­posed to kick in.

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