U.S. banks and thrifts must go through the painful process of recognizing losses associated with commercial real estate loans, a leading regulator said on Wednesday.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said banks should try to modify troubled commercial real estate loans, but must recognize losses if such a workout does not maximize value.

"The losses need to be recognized," Bair said to a commercial real estate (CRE) conference in Washington.

She also said that she expects the rates of noncurrent CRE loans to continue to rise, and reiterated her belief that the troubles in the sector will increasingly be a driver of bank failures this year.