Losses on commercial real estate loans pose the biggest risk to US banks this year, troubling smaller lenders but unlikely to threaten the entire financial system, US bank examiners concluded during a review.
“Losses from commercial real estate will be quite high by historic standards,” said Eugene Ludwig, former comptroller of the US currency who is now chairman of Promontory Financial Group, a Washington-based consulting firm to financial institutions. “Hundreds of banks will fail or will be resolved over the course of the cycle.”
The failure of loans backing malls, hotels and apartments may impede the US recovery as small and medium-sized banks reduce lending and conserve capital to absorb losses, analysts said.
Tight credit could slow the cycle of investment and hiring that is critical for sustained growth, they said.
Total loans and leases by banks in the US fell to US$6.79 trillion in November from US$7.23 trillion in the same month a year earlier, US Federal Reserve data showed.
The default rate on commercial mortgages held by US banks more than doubled to 3.4 percent in the third quarter, said Real Estate Econometrics LLC, a property research company in New York.
Default rates in the first three quarters of last year have been the highest since 1993, the firm said.
Losses on the debt will “place continued pressure on banks’ earnings” because collateral values have fallen, Jon Greenlee, associate director of the Fed’s bank supervision division, said in Nov. 2 testimony to the domestic policy subcommittee of the US House Committee on Oversight and Government Reform.
Banks and investors held about US$3.5 trillion in commercial real estate debt in June, with about US$1.7 trillion of that total on the books of banks and thrifts, Fed data showed.
About US$500 billion of the loans will mature each year over the next few years, Fed officials say.
Regional banks are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, data compiled by Bloomberg on bailout recipients showed.
Investors have recognized the comparative vulnerability of smaller banks. The KBW Regional Banking Index, which includes shares of Old National Bancorp of Evansville, Indiana, and Glacier Bancorp Inc of Kalispell, Montana, fell 24 percent last year compared with a 3.6 percent decline for the KBW Bank Index, which includes shares of JPMorgan Chase & Co and Citigroup Inc.
“The strong get stronger and the weak get weaker,” said Joel Conn, president of Lakeshore Capital LLC in Birmingham, Alabama, which specializes in financial stocks. “It is very difficult to come up with a scenario where earnings get anywhere back to normal for small banks with large commercial real estate exposures.”
Fed officials stepped up reviews of commercial real estate loans at banks last year. The Fed is focusing on banks smaller than the 19 largest lenders examined in May. Those institutions held assets exceeding US$100 billion.
Defaults among prime borrowers for residential mortgages will probably accelerate this year, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index.
Beijing’s continued provocations in the Taiwan Strait reveal its intention to unilaterally change the “status quo” in the area, the US Department of State said on Saturday, calling for a peaceful resolution to cross-strait issues. The Coast Guard Administration (CGA) reported that four China Coast Guard patrol vessels entered restricted and prohibited waters near Kinmen County on Friday and again on Saturday. A State Department spokesperson said that Washington was aware of the incidents, and urged all parties to exercise restraint and refrain from unilaterally changing the “status quo.” “Maintaining peace and stability across the Taiwan Strait is in line with our [the
EXTENDED RANGE: Hsiung Sheng missiles, 100 of which might be deployed by the end of the year, could reach Chinese command posts and airport runways, a source said A NT$16.9 billion (US$534.93 million) project to upgrade the military’s missile defense systems would be completed this year, allowing the deployment of at least 100 long-range Hsiung Sheng missiles and providing more deterrence against China, military sources said on Saturday. Hsiung Sheng missiles are an extended-range version of the Hsiung Feng IIE (HF-2E) surface-to-surface cruise missile, and are believed to have a range of up to 1,200km, which would allow them to hit targets well inside China. They went into mass production in 2022, the sources said. The project is part of a special budget for the Ministry of National Defense aimed at
READY TO WORK: Taiwan is eager to cooperate and is hopeful that like-minded states will continue to advocate for its inclusion in regional organizations, Lai said Maintaining the “status quo” in the Taiwan Strait, and peace and stability in the Indo-Pacific region must be a top priority, president-elect William Lai (賴清德) said yesterday after meeting with a delegation of US academics. Leaders of the G7, US President Joe Biden and other international heads of state have voiced concerns about the situation in the Strait, as stability in the region is necessary for a safe, peaceful and prosperous world, Lai said. The vice president, who is to be inaugurated in May, welcomed the delegation and thanked them for their support for Taiwan and issues concerning the Strait. The international community
COOPERATION: Two crewmembers from a Chinese fishing boat that sank off Kinmen were rescued, two were found dead and another two were still missing at press time The Coast Guard Administration (CGA) was yesterday working with Chinese rescuers to find two missing crewmembers from a Chinese fishing boat that sank southwest of Kinmen County yesterday, killing two crew. The joint operation managed to rescue two of the boat’s six crewmembers, but two were already dead when they were pulled from the water, the agency said in a statement. Rescuers are still searching for two others from the Min Long Yu 61222, a boat registered in China’s Fujian Province that capsized and sank 1.03 nautical miles (1.9km) southwest of Dongding Island (東碇), it added. CGA Director-General Chou Mei-wu (周美伍) told a