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NY Fed: “Extend and Pretend” Increases Risk to Financial System
Extending the maturities of troubled commercial real estate mortgages is increasing risks to the broader financial system, according to a Federal Reserve Bank of New York white paper, Reuters reported.
“Banks ‘extended-and-pretended’ their impaired CRE mortgages in the post-pandemic period to avoid writing off their capital, leading to credit misallocation and a buildup of financial fragility,” the study’s authors wrote.
Banks with “weaker” marked-to-market capital levels tied to losses in their securities holdings are the primary vector for the CRE mortgage extensions, according to the white paper. Since the first quarter of 2022, these institutions “pretended that such credit provision was not as distressed to avoid further depleting their capital,” the authors said.
Extending the maturity of these troubled loans has made it harder to make new CRE loans and increased the chances that troubled CRE mortgages will face an imminent reckoning, Reuters reported, citing the white paper. The New York Fed authors wrote, “The maturity extensions granted by banks also fueled the volume of CRE mortgages set to mature in the near term–a ‘maturity wall’ with the associated risk of large losses materializing in a short period of time.”
- ◦Financing
