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Fed Reviewing Banks' Commercial Real Estate Exposure

Wednesday, 16 Sep 2009 | 11:58 AM ET

The Federal Reserve is involved a broad review of commercial real estate exposures at the nation's largest regional banks, which Fed sources say is both the result of concern in that area but part of the "new normal" for how they will be supervising banks.

People familiar with the examinations say the fed is "getting granular" looking, for example, at the differences in banks' concentration of construction loans vs. multifamily vs. motels and retail.

The effort began after the stress tests earlier this year identified commercial real estate as a major area of concern but recently ramped up in intensity. It principally involves what fed sources call "horizontal reviews" which is looking at the loss rates and concentrations of similar assets across different banks. This is how fed officials have said recently they would be normally reviewing banks.

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The government hasn't decided yet whether to actually run stress tests on the information it gathers, that is, to see how these portfolios would perform under adverse economic scenarios.

Commercial real estate has hung over the banking system and efforts to quantify the danger could cut both ways: either make markets more nervous about the losses, or calm them down.

Banks