- Commercial real estate could suffer its biggest collapse since the Great Financial Crisis.
- This is bad news for banks, which could incur an additional $160 billion in losses.
- This is according to a recent NBER research report examining the impact of Fed rate hikes.
The commercial real estate sector is at risk of suffering the biggest collapse since 2008, with U.S. banks potentially facing losses of up to $160 billion.
That’s according to a new study by researchers at USC, Columbia University, Stanford University and Northwestern University assessing the impact of rising interest rates over time on the commercial real estate industry and the U.S. banking system.
The paper, titled “Monetary Tightening, Commercial Real Estate Distress, and U.S. Bank Vulnerability,” examines the Fed’s aggressive rate hikes in 2022 that will weigh on assets such as stocks, bonds, and commercial real estate. used a framework previously developed.
The report shows that approximately 14% of all loans and 44% of office loans have negative equity due to a decline in asset values due to interest rate hikes and remote work, which means that the current value is less than the loan balance. I assume that means.
As a result, 10% to 20% of all commercial real estate loans could default, which is on the lower end of the default rate estimated during the Great Financial Crisis, but banks could lose about $160 billion. It is said that there is a possibility that it will be affected. paper.
“This evidence suggests that if interest rates remain high and real estate values do not recover, default rates could reach levels comparable to or even higher than those seen during the Great Recession.” Ta.
Other experts have also warned of problems in the commercial real estate industry, saying the industry has about $1.5 trillion in debt maturing in the next few years.
The prospect of further bank losses has raised fears of a repeat of the bank run that upended Silicon Valley banks and other financial institutions earlier this year.
In a scenario in which half of uninsured depositors empty their accounts, the researchers say in a study report, losses related to commercial real estate could push between 31 and 67 small local banks into bankruptcy. It is estimated that there is. An additional 340 banks could face bankruptcy due to losses from rising interest rates.
“If such a CRE loan crisis were to emerge in early 2022, when interest rates are low, even under the most pessimistic scenario, no bank would fail. It is clear that asset values have fallen significantly in 2022, significantly impairing banks’ ability to withstand adverse credit events. ” the researchers said. The newspaper later added: “This exposure exposes the bank to significant solvency risk.”
Investors are focused on the stability of the US banking system. In August, rating agency Moody’s downgraded the credit ratings of 10 large and mid-sized U.S. banks and put another group of banks under review, citing heightened risk in bank assets.
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