Morning Wire Bank Failures & Commercial Real Estate Losses | Sunday Extra
May 7, 2023
Mark A. Calabria, a former director of the Federal Housing Finance Agency and senior advisor at the Cato Institute, discusses the ongoing turmoil in U.S. banking. He reveals that recent bank failures like First Republic and Silicon Valley Bank are linked to significant losses in regional banks, driven by commercial real estate struggles. Calabria explains how changing work habits post-pandemic have harmed sectors like retail while benefiting warehouses, and he emphasizes the need for risk diversification in banking.
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Commercial Real Estate Concerns
- The commercial real estate market is facing legitimate concerns due to pandemic-related changes and overbuilding.
- Increased vacancies in office spaces, overbuilding of apartments, and pandemic impacts on retail contribute to this.
Delinquency Predictions
- It's too early to determine the exact percentage of commercial buildings unable to make mortgage payments.
- Increased delinquencies are expected, potentially reaching double digits, especially during a recession.
Risk to Banks
- Commercial real estate investments, typically considered safe, pose a significant risk to banks if the market declines.
- Mid-size and regional banks, often specializing in real estate, face greater exposure and potential losses.