The Federal Reserve is currently reviewing banks' exposure to property, the troubled investment sector whose slide could pose a risk to many financial institutions because of the wide distribution of loans and mortgage-backed securities.

In its regulatory role, the Fed will look into a cross-section of banks to build a picture of how resilient institutions are to the falling value of loans and commercial mortgage-backed securities.

A cross-disciplinary team will look at the range of commercial property assets on banks' balance sheets, encompassing loans and CMBS.

"It is up to banks and bank regulators [to assess] the extent to which problems that have affected loans actually are reflected on the books," said Richard Parkus, analyst at Deutsche Bank. "I don't know when that happens and that's highly uncertain. The fact we don't have 10 banks a day going under [does not mean that] things are not as bad as we thought."

Commercial property prices are 26.9 per cent lower than one year ago and 33.9 per cent down on two years ago, according to an index compiled by Moody's Investor Service.

On Friday, the Federal Deposit Insurance Corporation seized Corus Bank, based in Chicago, which was failing because of bad loans on commercial property and condominiums.

But some with links to smaller banks believe the doomsday consequences have been over-played. "I don't think it's the doom and gloom scenario that we had in housing," said Steve Brown, chief executive of Pacific Coast Bankers' Bank, which serves thousands of community banks. "Spreads are tightening in a lot of the paper."

However, Mr Parkus said: "People seem to assume the positive news on the broader economy will be manifested commensurately in CRE - and I think that is not something that is likely to happen. We have a relatively enormous amount of deleveraging that has to take place."

Source: Financial Times