Bank Losses - CRE Sword of Damocles
Apologies for the lateness of this post. I took a week's vacation and missed these Q2 numbers on commercial banks from the Federal Reserve. Noah already posted a composite graph of some of these stats from Calculated Risk in a prior post, but I thought it was worth digging into the data a little. I will keep this short and hopefully punchy. Here are the highlights:
All loan delinquencies have now hit levels as high as they have ever been measured in the Fed's historical statistics going back to the last real estate debacle (View image).
This time around it appears banks are actually dealing with problem loans more quickly than in the early 90s, with charge-offs as a percentage of all loans now well ahead of prior peak levels ( View image).
Residential delinquencies have been the driver of this bank solvency crisis. They remain at record levels and continue to rise, albeit at a slower pace(View image).
While I was wrong earlier in the year in thinking that credit card providers would get their delinquencies under control quickly, the broad (some would say indiscriminate) pullback in consumer revolving credit appears to be having an impact and delinquencies may be peaking(View image).
Commercial & industrial loan losses continue to surge and are now near levels reached after the Dot Com collapse, but are still way below the late 80s to early 90s level. Where corporate defaults are going is still an open question (View image).
In my mind the chart above is key to the current banking crisis. Commercial real estate delinquencies started this cycle at miniscule levels, turned up much later than residential delinquencies, but have escalated rapidly. They are still well below the levels of the refinancing crisis of the early 90s. That said, a huge amount of maturing and defaulting CMBS in the next 12 months will put more pressure on real estate prices, hammering rents as properties are turned over to those with much lower new basis costs who can afford to charge less to get their properties occupied. This will ultimately increase the severity of bank real estate losses on the properties they still hold. Banks seem to be oblivious to this and hope that somehow green shoots are presaging a jolly green giant of a recovery to save their ASSets. I'm not sure I'm that optimistic. Commercial real estate losses will likely lead to phase 2 of banking failures/bailouts, as presaged by the recent increase in the list of banks on the FDIC's watch list.
Posted by MeekSheep
Sun Aug 30th, 2009 11:45 PM
That's an interesting graph but I think if you really want to emphasize just how much of the bank balance sheets are reflected in CRE loans you need to put up an updated chart like you had a few months ago. You know the one which listed by asset class what loans were on the bank books?