The Hidden Threat To Banks: Unraveling The Looming CRE Crisis
THE HIDDEN THREAT TO BANKS: UNRAVELING THE LOOMING CRE CRISIS
There is a looming threat to the banking sector, which is the foundation for any developed economy, that is receiving little attention even as the severity of the potential problem continues to grow.
The lurking threat is loans to the Commercial Real Estate sector (CRE), which has been under pressure for some time since the appearance of the Internet has changed shopping patterns and drastically reduced customer traffic in shopping and strip malls. The rise of the Internet has also reduced demand for office space as many jobs can be performed from remote locations. Current technological and demographic trends suggest that the pressure on CRE can be expected to continue to build.
The pain experienced by CRE has been amplified in recent years by the rise in interest rates, which has gathered strength in recent months as markets brace for the prospect of tariff wars and their inflationary effects.
The coming years will see large amounts of CRE debt that will require refinancing at considerably higher interest rates. It is this refinancing process that we believe may provide the catalyst for a major credit event for developed economies, similar to the events that produced the 2008 Financial Crisis.
Among large U.S. banks, Wells Fargo stands out as having the highest percentage exposure to CRE, while J.P. Morgan has the greatest aggregate exposure.
The greatest risk to CRE credit risk is carried by U.S. regional banks. One smaller bank, the New York Community Bank, has about a 57% loan exposure to the sector and has recently been downgraded to junk. Many other regional banks have concerning levels of exposure to CRE.
The CRE sector, and its potential effects on banks, are just one of the host of potential catalysts for the significant market volatility that we anticipate in the months and years ahead. The investing environment will be challenging, but history teaches that volatility often produces the most attractive investment opportunities.
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