The sharp headwinds facing U.S. banking companies from the commercial and residential loan market are far from over, a Federal Reserve official said Monday.

"Two years into a substantial economic downturn, loan quality is poor across many asset classes and … continues to deteriorate," said Jon Greenlee, an associate director of the Fed's division of banking supervision and regulation.

Appearing before a U.S. House panel in Atlanta, Greenlee said that the U.S. banking system is "far from robust." Foreclosures and losses from residential mortgages are expected to remain elevated, while sizable credit losses are a real possibility for many firms.

The healing process is just beginning, according to Greenlee.

"It will take some time for the banking industry to work through this current set of challenges and for the financial markets to fully recover," he said in prepared remarks.

One key area of concern for federal regulators is the commercial real estate market.

There has been increasing agitation that falling real estate prices and the problems in the residential housing market could cause commercial real estate portfolios to sour for firms, potentially leading to more bank failures.

"The losses will place continued pressure on banks' earnings, especially those of smaller regional and community banks that have high concentrations of CRE loans," Greenlee said.

Regulators took steps Friday to address the issue, releasing new guidance that will allow banks to consider commercial loans as "performing" even if the property backing the loan has fallen in value. The goal of the change is to encourage banks to rework troubled commercial loans, avoiding costly defaults.

Greenlee, discussing commercial market conditions, noted that the prices of existing properties have declined sharply from recent highs "and will likely decline further."

"Some large regional and community banking firms that have built up unprecedented concentrations in commercial and residential loans will be particularly affected by emerging conditions in real estate markets," Greenlee said.

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