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2017 stress test will focus more heavily on CRE

Commercial real estate developers in California may have read about what banking regulators are saying about the real estate market. After low interest rates caused a spike in CRE loans, banking regulators have become worried that banks are issuing too many of them. The Office of the Comptroller of the Currency has flagged CRE loans as risky, and the U.S. Federal Reserve is putting a greater focus on CRE in this year's stress test.

The Fed introduced its annual stress test along with other financial regulations after the 2008 financial crisis. The stress test requires banks to prove that they could survive a hypothetical scenario in which the economy takes a downturn. If banks cannot pass the stress test, the Fed will require the banks to boost their capital reserves before investors can be paid or new investment plans can move forward.

In this year's stress test, the Fed wrote a scenario in which unemployment hits 10 percent while stock markets, major global economies and commercial real estate markets decline significantly. The 2017 stress test imagines a more severe downturn in commercial real estate prices than the 2016 stress test, and only the biggest 13 banks are expected to pass the entire stress test. However, President Donald Trump has stated that he would like to do away with the stress test and other post-Recession financial regulations.

The results of the stress test and the impact of financial regulations could affect how easily financing can be obtained for new projects. A commercial real estate developer who has plans for starting new projects over the next year may want to speak with an attorney about changes in the financing market.

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