Contrary to the widely publicized assumption that the loan defaults going on in the U.S. commercial real estate (CRE) sector threaten community banks and mid-sized banks, and are not a threat to Wall Street megabanks or regional giants, the editors of GnS Economics Newsletter argue on Substack that the biggest banks faced the biggest threat of failure due to CRE loans blowing up. The analysis by Mate Suto and Tuomas Malinin is simple: Smaller banks have by far the largest relative exposure to CRE loans; but when it comes to non-performing CRE loans which are non-farm-based and are based on rent—not business income—as the means of servicing the loan, the non-performing or defaulted loans suddenly become 4.5% of all loans, and are held, almost entirely, by the largest Wall Street and regional banks. And these—typically large office buildings—are by far the largest mortgage and other loans in the CRE sector.
“The situation is expected soon to reveal its impact. Banks facing increasing problems will raise their provisions, negatively affecting their profitability and, more importantly, the credit market. [Wells Fargo has just announced a surprising, large increase in its loan-loss provision—ed.] Bank failures are almost certain to follow, as warned by the Chairman of the Fed, Jerome Powell. Buckle up!”
