The Fed Is on Bubble Watch

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

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.