Looming Real Estate Crisis Poses Risk to U.S. Banking Sector

Posted on September 26th, 2023 at 11:37 AM
Looming Real Estate Crisis Poses Risk to U.S. Banking Sector

From the desk of Jim Eccleston at Eccleston Law 

Over the past decade, regional banks have invested heavily in commercial real estate loans and related ventures in major cities. However, with the current downturn in the commercial real estate market, these trillions of dollars in loans and investments pose a looming threat to both the banking industry and potentially the broader economy.

According to a Wall Street Journal analysis, the actual exposure of banks is larger than commonly reported, raising concerns of a potential doom-loop scenario where loan losses prompt banks to reduce lending, further causing property prices to drop and amplifying the losses.

Banks also increased their exposure to commercial real estate in ways not typically included in their calculations. They extended loans to financial firms that provided loans to the same property owners and invested in bonds backed by similar properties. This indirect lending, combined with assets such as foreclosed properties, trading portfolios, and other commercial real estate-related assets raises banks' total exposure to commercial real estate to $3.6 trillion, equivalent to approximately 20 percent of their deposits.

The feared doom-loop scenario is unfolding in some major cities where office vacancies have surged. Real estate investors, unable to refinance their debts or only able to do so at high interest rates, are defaulting on their loans. This leads to lenders no longer receiving debt payments, often having to reduce the value of these mortgages, and occasionally, banks ending up owning the properties.

 

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.

Tags: eccleston, eccleston law

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