Why trade real estate stress could affect US banks more than expected

Last week, the Financial Stability Board (FSB), an international agency that monitors and makes recommendations on the global financial system, published a report that analyzes vulnerabilities in non -bank commercial real estate investors (CRE). A key approach were the complexes between banks and investors of non -banking CRE, which amplifies the potential of the indirect effects of CRE market shocks.

According to the FSB, the Global Financing of CRE (capital and debt) is estimated at more than $ 12 billion, and the United States represents $ 6 billion. This makes the report especially relevant to US banks and the broader financial system.

The report identifies three main vulnerabilities in Banking CRE investors:

1. They do not coincide: some open property funds face important liquidity mismatches, making them vulnerable to racing.
2. High leverage: the financial leverage raised in some reit and property funds could lead to forced disappointment if the properties of the properties decrease or the debt cannot be refinant, spreading stress throughout the CRE market.
3. Iliquidity and price risks: the illiquidity of the creation market makes it difficult to fix assets and collateral prices, especially during stress. The rare valuations and practices of “extending and pretending” rare “can delay losses recognition, causing abrupt losses in prolonged recessions. The improved transparency and incorporation of the uncertainty of assessment in risk management could mitigate this.

While this report is also relevant to Reit investors (since the FSB warns that many could face bankruptcy due to liquidity problems), the intertwined and the indirect effects of banks are more critical for our approach.

Despite the recent increases in CRE -related NPLs, important systemic problems have not emerged. As highlighted in our previous articles, US banks widely use “extending and pretending” strategies. New York fed explicitly says: “US banks are extending the Deterior CRE mortgages to avoid canceling capital, which leads to credit confusion and an accumulation of financial fragility.”

This creates a scope of “maturity wall” between the late 2025 and 2027, an important risk of financial stability. But CRE’s direct loans are only part of the exposure of US banks to CRE.

The FSB also points out that banks (especially the largest) provide leaf lines out of balance not guaranteed to investors of non -banking CRE. These are difficult to measure, even for regulators. Reit use these more lines during stress than other intermediaries. The “extending and pretending” approach also applies to bank -term loans for Reit.

Especially the great US institutions, they are exposed even more through:

• CMBS Investments (the US CMBS market is ~ $ 636b from the second quarter of 2024 compared to € 29b in Europe),
• Warehouse lines for CMBS emitters,
• Holdings of Reit and Property Founders.

In particular, ~ 45% of the US CMBs agreements are focused on offices and retail segments on difficulties.

Finally, there are intertwood through exposure to property developers.

Therefore, US banks face exposure to CRE through:

1. Direct loans CRE,
2. Balance -Balance Sheet Credit Lines to Bann Non Banking Investors,
3. CMBS holdings and financial,
4. Loans/exhibitions to property developers.

The total exposure of the US bank exceeds the $ 5 billion, more than 200% of the aggregate capital of the sector. (Discussed in previous articles).

The FSB concludes that, although Cre Reit/No Bancos investors face significant problems (potentially lead to important problems for them), these may not pose independent systemic risks in all jurisdictions. However, they could amplify and transmit clashes to banks. American banks are especially vulnerable given their massive exhibitions.

The followers of our banking work will recognize these problems. However, it is significant to see this warning of the main international financial body of the world.

End

You believe it or not, there are more important problems in the largest bank balances compared to the smallest banks, which we have covered in previous articles. In addition, consider that there was an important problem that caused the GFC in 2008, while today we have many more big problems in bank balances.

These risk factors include important problems in commercial real estate, the increase in consumer debt risks (which is close to 2007 levels), long -term submarine values, free sale derivatives and high -risk shadow banking (whose loans have exploited). Then, in our opinion, the current banking environment presents even greater risks than we have seen during the GFC 2008.

Almost all the banks that we have recommended to our clients are community banks, which have none of the problems we have been describing in recent years. Of course, we are not saying that all community banks are good. There are many small community banks that are much weaker than the largest banks.

That is why it is absolutely imperative to participate in a proper exhaustive diligence to find a safer bank for your money earned so much. And what we have found is that there are still some very solid and safe community banks with conservative commercial models.

Therefore, I want to take this opportunity to remind you that we have reviewed many larger banks in our public articles. But I must warn him: the substance of that analysis does not look too good for the future of the largest banks in the United States, and you can read about them in the previous articles we have written.

In addition, if you believe that bank problems have been addressed, I think New York Community Bank reminds us that we have probably only seen the tip of the iceberg. We were also able to identify the exact reasons in a public article that caused SVB to fail. And I can assure you that they have not been resolved. Now it’s just a matter of time before the rest of the market begins to realize. By then, it is likely to be too late for many bank deposits holders.

At the end of the day, we are talking about protecting your money earned so much effort. Therefore, it is responsible for participating in due diligence with respect to banks that currently house their money.

You have the responsibility of you and your family to ensure that your money lies only in the safest institutions. And if you trust the FDIC, I suggest that you read our previous articles, which describes why such dependence will not be as prudent as you can believe in the coming years, with one of the main reasons that are the desired movement of the banking industry towards the bailings. (And, if you don’t know what a rescue is, I suggest you read our previous articles).

It is time for him to make a deep immersion on the banks that house their money earned so much effort to determine whether your bank is really solid or not. Check our diligence methodology due here.

Avi (Jo 🙂 Gilburt is the founder of Elliottwavetrader.net and saferbankingrearch.com.