Top U.S. banks struggle with property debt – But is that it?
Right now, the largest U.S. banks are trying to make sense of the commercial real estate debt that has got them in a bit of a bind. Thanks to a recent surge in late payments tied to everything from office spaces to shopping malls, financial institutions JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley, are seeing their safety nets shrink faster than ice in a Mojito on a hot day. Clearly, gone are the days of lounging comfortably on reserves that looked more than adequate.
The Creeping Concern of Commercial Debt
Over the last year, it’s become apparent that these banks underestimated the appetite of commercial property debt for their loss reserves. Data from the Federal Deposit Insurance Corporation (FDIC) paints a rather stark picture: average reserves plummeted from $1.60 to 90 cents for every dollar of commercial real estate debt that’s been collecting dust for at least 30 days. The total tab for delinquent commercial property debt across these six banking giants nearly tripled, soaring to a staggering $9.3 billion.
The U.S. Federal Reserve, with Michael Barr’s supervision, has been peering over the shoulders of these banks, scrutinizing their commercial real estate (CRE) lending practices with the kind of intensity usually reserved for a final exam proctor. The focus is razor-sharp on how the institutions report their risk, provision for potential future losses, and whether they’re stockpiling enough capital to weather the storm.
Effects on U.S. Banking Sector
However, this problem isn’t confined to just the big players. The entire U.S. banking sector is feeling the heat, with the value of delinquent loans tied to commercial properties more than doubling last year to a jaw-dropping $24.3 billion. The cushion to absorb these potential losses? Thinner than ever, with banks holding a mere $1.40 in reserves for every dollar of delinquent loans, marking the lowest cover in over seven years.
Industry experts, like Bill Moreland from BankRegData, are ringing alarm bells, warning that the banking sector may need to significantly beef up its allowances for loan losses. The situation has grown so dire that New York Community Bank saw its market value halved after unveiling hundreds of millions in previously swept-under-the-rug potential losses in its commercial property loan portfolio.
At the center of this are loan allowances, essentially the rainy day funds banks set aside to cover future losses. Banks have traditionally played a balancing act, juggling the need to provision for losses without taking a sledgehammer to their earnings. However, with the ghost of COVID-19 still haunting commercial properties, especially office spaces, some argue that relying on historical loss rates is like driving with the rearview mirror.
Take it from João Granja, an accounting professor with a front-row seat to the drama at the University of Chicago’s Booth School of Business. He points out the elephant in the room: if commercial properties can’t drum up enough business to pay their debts, banks will have no choice but to foreclose. It’s a scenario that spells trouble, suggesting that banks need to stop living in the past and start preparing for a potentially rocky future.
Bank executives, meanwhile, are putting on a brave face. They claim their reserves were pumped up more than necessary and are now being gradually deflated as delinquencies rise. But as delinquencies on loans tied to office and apartment buildings jump, and banks slash their loss reserves, it’s clear there’s a disconnect somewhere.
With banks potentially staring down the barrel of up to $60 billion in losses from soured commercial real estate loans over the next five years, the current $31 billion in reserved losses seems like a drop in the ocean. Yet, in a hilarious plot twist, the U.S. economy appears to be sidestepping the recession everyone was bracing for in 2024. The Conference Board’s leading economic index suggests a slowdown but not a full stop. Despite a dip in January, the index’s mixed signals hint at an economy that’s stubbornly outperforming gloomier forecasts.
Read More
Top U.S. banks struggle with property debt – But is that it?
Right now, the largest U.S. banks are trying to make sense of the commercial real estate debt that has got them in a bit of a bind. Thanks to a recent surge in late payments tied to everything from office spaces to shopping malls, financial institutions JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley, are seeing their safety nets shrink faster than ice in a Mojito on a hot day. Clearly, gone are the days of lounging comfortably on reserves that looked more than adequate.
The Creeping Concern of Commercial Debt
Over the last year, it’s become apparent that these banks underestimated the appetite of commercial property debt for their loss reserves. Data from the Federal Deposit Insurance Corporation (FDIC) paints a rather stark picture: average reserves plummeted from $1.60 to 90 cents for every dollar of commercial real estate debt that’s been collecting dust for at least 30 days. The total tab for delinquent commercial property debt across these six banking giants nearly tripled, soaring to a staggering $9.3 billion.
The U.S. Federal Reserve, with Michael Barr’s supervision, has been peering over the shoulders of these banks, scrutinizing their commercial real estate (CRE) lending practices with the kind of intensity usually reserved for a final exam proctor. The focus is razor-sharp on how the institutions report their risk, provision for potential future losses, and whether they’re stockpiling enough capital to weather the storm.
Effects on U.S. Banking Sector
However, this problem isn’t confined to just the big players. The entire U.S. banking sector is feeling the heat, with the value of delinquent loans tied to commercial properties more than doubling last year to a jaw-dropping $24.3 billion. The cushion to absorb these potential losses? Thinner than ever, with banks holding a mere $1.40 in reserves for every dollar of delinquent loans, marking the lowest cover in over seven years.
Industry experts, like Bill Moreland from BankRegData, are ringing alarm bells, warning that the banking sector may need to significantly beef up its allowances for loan losses. The situation has grown so dire that New York Community Bank saw its market value halved after unveiling hundreds of millions in previously swept-under-the-rug potential losses in its commercial property loan portfolio.
At the center of this are loan allowances, essentially the rainy day funds banks set aside to cover future losses. Banks have traditionally played a balancing act, juggling the need to provision for losses without taking a sledgehammer to their earnings. However, with the ghost of COVID-19 still haunting commercial properties, especially office spaces, some argue that relying on historical loss rates is like driving with the rearview mirror.
Take it from João Granja, an accounting professor with a front-row seat to the drama at the University of Chicago’s Booth School of Business. He points out the elephant in the room: if commercial properties can’t drum up enough business to pay their debts, banks will have no choice but to foreclose. It’s a scenario that spells trouble, suggesting that banks need to stop living in the past and start preparing for a potentially rocky future.
Bank executives, meanwhile, are putting on a brave face. They claim their reserves were pumped up more than necessary and are now being gradually deflated as delinquencies rise. But as delinquencies on loans tied to office and apartment buildings jump, and banks slash their loss reserves, it’s clear there’s a disconnect somewhere.
With banks potentially staring down the barrel of up to $60 billion in losses from soured commercial real estate loans over the next five years, the current $31 billion in reserved losses seems like a drop in the ocean. Yet, in a hilarious plot twist, the U.S. economy appears to be sidestepping the recession everyone was bracing for in 2024. The Conference Board’s leading economic index suggests a slowdown but not a full stop. Despite a dip in January, the index’s mixed signals hint at an economy that’s stubbornly outperforming gloomier forecasts.
Read More