Powell: We continue to monitor banking closely

Fed Chairman Jerome Powell said on Thursday that the Fed was monitoring developments in the banking sector “very carefully” due to potential vulnerabilities such as the commercial real estate sector. Speaking at an event organized by the Spanish central bank in Madrid, Powell noted that it was still time to say whether the volatility in the sector was over. Powell noted that the sector still had some funding gaps, as seen in the banking crisis in March when deposit outflows led to the collapse of Silicon Valley Bank (SVB) and two other U.S. banks, but he said that deposit inflows had stabilized. Powell said that banks’ capital was generally “strong and liquidity was very, very high,” as seen in the Fed’s stress test on Wednesday. Regarding the commercial real estate sector, Powell noted the effects of work-from-home practices on the office segment, and said the risks were not concentrated in large banks. The Fed chairman also said that U.S. regulators had not yet addressed the issues with money market funds. "There were some big inflows into money market funds during the March crisis. Those have stopped. During any tightening cycle, people tend to move their money out of bank deposits into money market funds over time because of the higher yields. That causes banks to tighten their lending conditions, which is of course a desirable outcome," Powell said.