Yellen: Vacant office buildings will cause banking stress and losses

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Treasury Secretary Janet Yellen testified before the Senate Banking Committee on Thursday, revealing that while large banks have low exposure to commercial real estate, smaller banks may be feeling the pressure. Yellen assured the committee that the issue is manageable and does not pose a systemic risk to the nation’s financial system. She also addressed concerns about inflation, noting that it is slowing down while wages continue to grow.

This testimony comes at a time when smaller banks are grappling with the stress caused by high office building vacancy rates, high interest rates, and falling valuations, eventually leading to losses. Yellen emphasized the importance of monitoring non-traditional banking institutions, specifically non-bank mortgage lenders, which lack access to deposits and are heavily reliant on short-term financing. These factors pose a significant risk to the mortgage market and the overall financial system, according to Yellen.

Despite these challenges, Yellen highlighted the strength of the US economy, citing the slowing down of inflation and the continuous growth of wages. She also addressed concerns raised by Pennsylvania Democratic Sen. John Fetterman regarding Americans’ experience of the economy in their daily lives, particularly in light of viral videos highlighting expensive McDonald’s meals. Yellen pointed to recent surveys that show a positive improvement in Americans’ attitudes about the economy and their financial situations, especially with the slowdown of inflation. She also noted the record number of business applications filed in 2023, indicating strong confidence in the future of the economy.

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