The Growing Concern of CRE Loan Risk Among Large Banks
The commercial real estate (CRE) market is facing increased scrutiny as pressures mount on larger banks, according to a recent report from S&P Global Market Intelligence. The report revealed that large banks have more exposure to CRE loan risk than previously thought, leading to concerns about potential financial instability.
This revelation comes after a period of shifting trends in the CRE market. In November 2023, small banks were increasing their number of CRE loans while large banks were becoming more cautious. However, by mid-May of this year, distress levels in the CRE market had spiked, prompting concerns about the extend-and-pretend practices of lenders, including large banks.
Further complicating the situation is the invisible exposure that banks have to CRE debt through credit lines extended to nonbank financial intermediaries. Researchers from various institutions have warned that this less obvious relationship means that larger banks face more risk from CRE than is commonly assumed.
In response to these concerns, the Federal Reserve conducted stress tests on the largest US banks in June and determined that they have sufficient capital to withstand severe economic and market turmoil, including a significant drop in commercial real estate values. However, JPMorgan Chase raised questions about the Fed’s projections for Other Comprehensive Income (OCI), suggesting that stress losses could be higher than anticipated.
The report from S&P Global also highlighted the weakest point for large banks: loans on nonowner-occupied properties. Delinquencies and net charge-offs on these properties have been on the rise, with large banks experiencing higher delinquency rates compared to owner-occupied properties.
Overall, the data paints a concerning picture of the CRE market and the potential risks that large banks face. As investors and regulators continue to monitor the situation, the stability of the commercial real estate sector remains a key area of focus for the financial industry.
