Fed's Powell: we are still monitoring the banks' situation very carefully

By Jesús Aguado and David Latona

MADRID (Reuters) -The U.S. Federal Reserve is still monitoring the situation in the banking industry "very carefully" to address potential vulnerabilities, such as in the commercial real estate sector, Fed Chair Jerome Powell said on Thursday.

"We are very reluctant to say" if the sector's turmoil is over, Powell said during an event held by the Spanish central bank in Madrid. "Our job is to worry about things."

Powell acknowledged the sector still had some funding vulnerabilities - as seen in March during the banking crisis in which deposit runs caused the Silicon Valley Bank (SVB) and two other U.S. lenders to fail - though "deposit flows have settled down."

SVB and the two other banks found themselves on the wrong end of Fed interest rate hikes, suffering large unrealized losses on their U.S. Treasury bond holdings, which spooked uninsured depositors.

Powell said that overall, bank capital was "strong and liquidity is very, very high", as seen in the Federal Reserve's annual health check on Wednesday.

Regarding the commercial real estate sector, Powell acknowledged there was "a valuation adjustment going on, mainly about offices. Work-from-home has changed the story," he said, though risks were not concentrated in the large banks.

The Fed chair also said that U.S. regulators hadn't addressed the issues with money market funds yet.

"There were some big inflows into money market funds during the March crisis. Those have stopped," he said.

During any tightening cycle, people tend to move money over time from bank deposits into money market funds due to higher yields.

"This causes banks to tighten lending conditions and that, of course, is a desired result. As long as that's an orderly process, it's expected as part of what we do," Powell said.

(Reporting by David Latona and Jesus Aguado, editing by Inti Landauro, Toby Chopra and Christina Fincher)

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