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KC Fed Chief: Commercial Real Estate Dragging Down Community Banks

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The president of the Federal Reserve Bank of Kansas City expects commercial real estate to continue to be a drag on bank earnings for "some quarters yet." Still, Thomas Hoenig believes community banks that pursue a business model focusing on customer relationships will be a source of strength for local economies. "Community banks have maintained a strong presence despite industry consolidation because their business model focuses on strong relationships with their customers and local communities," Hoenig said earlier this week before a congressional subcommittee on oversight and investigations in Overland Park, Kansas. "Community banks serve all facets of their local economy including consumers, small businesses, farmers, real estate developers, and energy producers," he said. "They know their customers and local markets well; they know that their success depends on the success of these local firms; and they recognize that they have to be more than a gatherer of funds if they hope to prosper." Hoenig has cast the lone dissenting vote at each of the Federal Open Market Committee’s this year, as he feels the ZIRP is no longer necessary, inhibits the committee's ability to adjust policy when needed, and eventually may lead to inflation. The federal funds rate was lowered to between 0% and 0.25% in December 2008. Hoenig wants the benchmark rate increased to 1% and then pushed to 2% soon thereafter. He also doesn't think reinvesting maturing mortgage-backed securities funds into Treasurys to maintain balance sheet levels helps support "a return to the committee's policy objective." Write to Jason Philyaw.

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