Bank Watch, page-2949

USA banks are having a really hard time which is expected to continue and may worsen. It looks like a house of cards to me.

It is only the Fed’s liquidity measures that are stopping heaps more banks going to the wall and a run on more banks. A SMH article notes “There has been no repeat of the lightning-fast bank runs that brought down Silicon Valley Bank, First Republic, and two smaller lenders last March, with contagion toppling Credit Suisse in Europe. But that is because the Fed’s liquidity support has allowed lenders to ‘‘ extend and pretend’’ .

The Fed may need to take a lot more action but even if they do we are looking at a very fragile banking system in the USA. It reminds me of what started to happen in 2007 and then it took 18 months before matters exploded to create the GFC. Are we facing a similar situation especially given this statement in the paper:

‘‘ Default rates could potentially reach levels comparable to or even surpassing those seen during the Great Recession,’’ said the paper, published by the National Bureau of Economic Research.

There are 2 issues being A. Losses on bonds from rising interest rates and B. Commercial real estate losses as occupancy rates are around 50% and debt refinancing at much higher rates slashing property valuations by possibly around 50%.

Regarding A. above the following is a chart from SCP Resource Financing article of 21 November 2023 (previously Sprott Capital Partners prior to a buyout in mid-2023). The following image summarises the issue quite well. Losses are huge for banks.



For B and article from the SMH of 10 January which was first published in the UK Telegraph titled “Commercial property values slump could trigger fresh US bank failures”. The comments from a NY Fed member is very telling as his company defaulted on a $US240m loan and he expects 500 to 1,000 banks to disappear. The article is based on a paper from 4 finance experts who state property values have fallen by 50% from their peak and 45% of all office loans are in negative territory. The equity is wiped out and half the loan is wiped out.

This article states 2,000 banks are facing negative capital due to interest rate shock and losses on bonds before even considering losses on commercial property loans which are concentrated on regional banks - ie more banks will face negative capital. It also states that 300 banks are at risk of facing a solvent run.


It looks like a house of cards

- Emergency lending by the US federal authorities has bathed America’s struggling regional banks in short-term liquidity, disguising the slow-burn damage of the US commercial property slump. A sobering analysis by four of the country’s leading finance experts says this comfort blanket has created a beguiling illusion of stability.

- ‘‘ It’s not a liquidity problem; it’s a solvency problem,’’ said Professor Tomasz Piskorski, a banking specialist at Columbia University, and one of the lead authors. ‘‘ Temporary measures have calmed the market, but half of all US banks are running short of deposits with assets worth less than their liabilities, and we are talking about $US9 trillion,’’ he said. “It is a very fragile situation and the Federal Reserve is watching it closely’’

- ‘‘ The entire commercial real estate space has to be reset. No one really knows where the values are,’’ said Scott Rechler, chairman of Long Island developer RXR and a board member of the New York Fed. He said lenders are only just starting to capitulate and mark down loans. ‘‘ As an industry, we’re in the first innings of what’s going to be a long game,’’ he said.

He even defaulted recently on a $US240 million loan for a 33-storey office tower at New York’s 61 Broadway, handing the keys to a syndicate of banks. It is their headache now.

Rechler expects 500 to 1000 banks to disappear in a wave of consolidation. They have faced a relentless leakage of deposits to money market funds paying higher interest, compounding their property woes.

There has been no repeat of the lightning-fast bank runs that brought down Silicon Valley Bank, First Republic, and two smaller lenders last March, with contagion toppling Credit Suisse in Europe. But that is because liquidity support has allowed lenders to ‘‘ extend and pretend’’ . The NBER paper said banks have $US2.7 trillion of total exposure to commercial property. Almost 70 per cent is concentrated among small and mid-sized regional lenders. Most have burned through their safety buffers. Moody’s says exposure among regional banks with assets below $US250 billion is 180 per cent of their capital.

The full threat to the financial system is larger because some 2000 banks are already facing ‘‘ negative capitalisation’ ’ due to the broader interest rate shock and paper losses on bonds. Any further stress in commercial property could push another tier of lenders over the edge.

The paper estimates that 300 banks risk ‘‘ solvency runs’’ . The trouble may not stop there: contagion could trigger ‘‘ a widespread run by uninsured depositors, unravelling a fragile equilibrium in the banking system.’’

Professor Stijn Van Nieuwerburgh, a property and finance expert at Columbia University, said ‘‘ It’s a train wreck in slow motion,’’

Rechler says this episode is not a repeat of the Lehman crisis. It resembles the savings and loan saga thirty years ago, which led to the failure of 747 ‘‘ thrifts’ ’ and a taxpayer clean-up but never reached a systemic threshold. ‘‘ This is very like the early 1990s, it’s not 2008,’’ he said.