Fed's Bies: Housing Market Going Through 'Orderly' Adjustment

The U.S. housing market is going through a "fairly orderly" adjustment process, with the strength of the banking system helping to cushion any potential effects from the slowdown, Federal Reserve Governor Susan Bies said on Wednesday.

Although she couldn't rule out a more serious correction, Bies's comments echoed those made on Tuesday by Dallas Fed President Richard Fisher, who also played down concerns in some quarters on the sector.

"Now that many investors perceive that (house) prices have peaked... they are trying to sell, so excess demand is becoming excess supply. But at this point we still think it's fairly orderly," Bies told reporters in London after giving a speech at the British Bankers' Association.

"We feel very good because banks' earnings are very strong and capital is very strong, so it provides a good foundation to absorb any changes in the housing market," Bies said.

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On Tuesday, Fisher warned against over-fixating on the U.S. housing market slowdown, which he characterised as one of most analysed and over-anticipated adjustments in history.

He recognised that the sector has gone through a rocky patch recently and has contributed to the slowing of overall economic growth. But he warned against becoming fixated about one sector of the economy, adding that housing and the auto sector apart, the United States is firing on all cylinders.

In her speech to the BBA on Wednesday, Bies was less sanguine on commercial real estate, saying that U.S. regulators were concerned some U.S. banks were increasingly concentrating their lending in the segment.

"While credit quality has been very good in recent years in the U.S., regulators are concerned about some emerging practices," Bies said.

"In fact, the aggregate CRE (commercial real estate) concentrations for small-to-medium-sized U.S. banks, relative to capital, are now twice the exposures before the substantial real estate downturn in the late 1980s," she added.

Bies noted that U.S. regulators recently issued proposed new "guidance" for U.S. banks on the matter and would "expect to see bankers pay greater attention to strengthening their portfolio risk management practices".

On balance, Bies offered a relatively upbeat assessment of financial markets' health without discussing current U.S. economic conditions.

"Despite a number of notable shocks, financial markets have generally remained stable in recent years," Bies said.

"Investors currently seem optimistic about the economic and financial outlook, with risk spreads relatively narrow and implied volatilities fairly low," she said.

But Bies added that central bankers and regulators cannot count on such conditions to last indefinitely and must be prepared if credit quality deteriorates.

Bies made no mention of U.S. monetary policy in her speech or to reporters afterwards.

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