Core Texts: American banks face mounting pressures

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The week Core Text’s focuses on US banks and how they’re facing bad property debt, declining reserves, and new regulations.

American banks face mounting pressures 😬

💡 What you need to know: The Financial Times reports a growing concern amongst commercial lenders about the bad CRE debt they have amassed, which now exceeds existing reserves at major banks like JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley. The average reserve for these banks has dropped from $1.60 to 90 cents for every dollar of office debt that is at least 30 days overdue. While JPMorgan Chase maintains a CRE coverage ratio close to 3.0, the ratios for other banks fall below 1.0, with Citigroup and Goldman Sachs dipping below 0.5. The Federal Reserve has expressed concerns regarding banks’ handling of CRE loans, particularly given the reduced demand for office space and rising interest rates impacting valuations. The Fed’s response has included issuing supervisory findings, downgrading supervisory ratings, and increasing enforcement actions. This may not prove sufficient, as new Basel III regulations may compel banks to maintain higher capital reserves, limiting their available investment pool and stifling their earning potential. 😰

Why it is important: The intersection of rising pressures from CRE loans and the impending implementation of Basel III regulations poses a significant challenge to commercial banks. The expected increase in capital requirements could lead to a contraction in CRE lending, as banks are forced to pass on new investment opportunities to meet reserve requirements. Bob Broeksmit, CEO of the Mortgage Bankers Association, voiced concern that Basel III could significantly restrict banks’ ability to finance real estate, affecting about 50% of all CRE lending. According to CBRE Global Chief Economist Richard Barkham, this shift in behavior could result in as much as $60B in missed revenue over the next five years – almost twice the $31B put aside to date to cover CRE loan losses. 🚩

The situation is further complicated by the proposed treatment of defaulted CRE loans under Basel III. Its stipulations were designed to enhance bank stability by increasing the amount of money lending institutions must keep on hand. Instead, it may have the opposite effect. If banks are permitted less money to plug holes as they emerge, then a new crisis in another sector could force them to liquidate their defunct CRE positions to address it and realize mass losses at scale. This would devastate the CRE market and banking system: a frightening prospect. 😳

Stand by for future updates.

More news and notes 📌

🛑 Manulife’s Erin Patterson refuted speculation of a CRE ‘doom loop.’

📉 Nashville CRE sales just hit a 12-year low, according to the NBJ.

⚖️ CBRE argued that CRE lending is stabilizing, though some disagree.

🤳 ESRT launched an Avalanche NFT utilizing Uptop to draw more tourism.

🏥 Lincoln hired a new EVP to oversee healthcare real estate investments.

💸 HSBC & Google jointly announced $1B in future climate tech financing.

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