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.
INVESTIGATION: The case is the latest instance of a DPP figure being implicated in an espionage network accused of allegedly leaking information to Chinese intelligence Democratic Progressive Party (DPP) member Ho Jen-chieh (何仁傑) was detained and held incommunicado yesterday on suspicion of spying for China during his tenure as assistant to then-minister of foreign affairs Joseph Wu (吳釗燮). The Taipei District Prosecutors’ Office said Ho was implicated during its investigation into alleged spying activities by former Presidential Office consultant Wu Shang-yu (吳尚雨). Prosecutors said there is reason to believe Ho breached the National Security Act (國家安全法) by leaking classified Ministry of Foreign Affairs information to Chinese intelligence. Following interrogation, prosecutors petitioned the Taipei District Court to detain Ho, citing concerns over potential collusion or tampering of evidence. The
Seventy percent of middle and elementary schools now conduct English classes entirely in English, the Ministry of Education said, as it encourages schools nationwide to adopt this practice Minister of Education (MOE) Cheng Ying-yao (鄭英耀) is scheduled to present a report on the government’s bilingual education policy to the Legislative Yuan’s Education and Culture Committee today. The report would outline strategies aimed at expanding access to education, reducing regional disparities and improving talent cultivation. Implementation of bilingual education policies has varied across local governments, occasionally drawing public criticism. For example, some schools have required teachers of non-English subjects to pass English proficiency
‘FORM OF PROTEST’: The German Institute Taipei said it was ‘shocked’ to see Nazi symbolism used in connection with political aims as it condemned the incident Sung Chien-liang (宋建樑), who led efforts to recall Democratic Progressive Party (DPP) Legislator Lee Kun-cheng (李坤城), was released on bail of NT$80,000 yesterday amid an outcry over a Nazi armband he wore to questioning the night before. Sung arrived at the New Taipei City District Prosecutors’ Office for questioning in a recall petition forgery case on Tuesday night wearing a red armband bearing a swastika, carrying a copy of Adolf Hitler’s Mein Kampf and giving a Nazi salute. Sung left the building at 1:15am without the armband and apparently covering the book with a coat. This is a serious international scandal and Chinese
NEGOTIATIONS: The US response to the countermeasures and plans Taiwan presented has been positive, including boosting procurement and investment, the president said Taiwan is included in the first group for trade negotiations with the US, President William Lai (賴清德) said yesterday, as he seeks to shield Taiwanese exporters from a 32 percent tariff. In Washington, US Trade Representative Jamieson Greer said in an interview on Fox News on Thursday that he would speak to his Taiwanese and Israeli counterparts yesterday about tariffs after holding a long discussion with the Vietnamese earlier. US President Donald Trump on Wednesday postponed punishing levies on multiple trade partners, including Taiwan, for three months after trillions of US dollars were wiped off global markets. He has maintained a 10 percent
RSS