The Banking Worries in the US: Unveiling the Triggers, State of Real Estate, and Potential Impacts
Recent concerns surrounding the US banking sector have sent ripples across the financial markets. Several crucial factors have exacerbated these worries, including the challenges faced by New York Community Bancorp, a Japanese bank’s unexpected losses in the US commercial real estate market, and Deutsche Bank’s exposure and losses in the same sector.
Despite the abundance of economic data, it is these headlines that have had the most profound impact on US 10-year yields, causing a significant decline of 14 basis points throughout the week.
Evident similarities to the 2008 subprime crisis have begun to emerge, as the true extent of the problem regarding both the scale of potential losses and the identities of entities carrying these losses remains shrouded in uncertainty. The evolution of work-from-home arrangements following the global pandemic has severely impacted office real estate, leading to surging vacancies and emboldening tenants to demand reduced rents with significant leverage.
While UK banking rules mandate the recognition of impairments once losses can be reasonably foreseen, this recognition has yet to fully materialize due to the ambiguous nature of the situation and the uncertainty surrounding the return of workers to office spaces and the potential exodus of companies.
Considering all possible scenarios, losses are expected to soar to unprecedented levels. Goldman Sachs has projected that around $1.2 trillion worth of commercial mortgages are set to mature this year and the next, accounting for approximately 25% of all outstanding commercial mortgages—an all-time high since 2008.
The majority of these mortgages, roughly 40%, reside with banks, intensifying concerns regarding their overall stability. Other estimates indicate that the “maturity wall” may extend as high as $1.5 trillion, according to Reuters.
CEO of Starwood Capital Group, Barry Sternlicht, whose firm manages $115 billion in assets under management, highlighted the grim predicament the office market currently faces. He stated, “It’s a $3 trillion asset class that is probably worth $1.8 trillion. There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.”
To put this into perspective, the entire subprime US mortgage market in 2007 was approximately $1.3 trillion, further underscoring the severity of the situation.
Key Challenges Amplifying the Risk
- Significant exposure to losses by regional and smaller banks lacking the financial fortitude to bear substantial burdens
- Extreme difficulty in raising new capital due to losses incurred in the hold-to-maturity bond market, mainly rendering this avenue for recovery practically infeasible
As observed, the bond market’s abrupt apprehension in response to these developments underscores the vulnerability and seriousness of the situation.
