Deposit runs have led to the collapse of three U.S. banks this year, but another concern is building on the horizon.
Commercial real estate is the area most likely to cause problems for lenders, JPMorgan Chase CEO Jamie Dimon told analysts Monday.
May 23 – PacWest Bancorp’s (PACW.O) shares rose nearly 13%, extending gains from the previous session driven mostly by news that the lender would sell $2.6 billion worth of its loan portfolio to bolster its finances.
The stock was trading up at $7.06 on Tuesday, helping to lift the shares of other regional lenders with the KBW Regional Banking Index (.KRX) and the S&P Regional Banks Index (.SPCOMBNKS) each gaining more than 2%.
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US bank lending contracted by the most on record in the last two weeks of March, indicating a tightening of credit conditions in the wake of several high-profile bank collapses that risks damaging the economy.
Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a a drop in loans by small banks.
Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them?
“Refinancing risks are front and center” for owners of properties from office buildings to stores and warehouses, Morgan Stanley analysts including James Egan wrote in a note this past week. “The maturity wall here is front-loaded. So are the associated risks.”
The investment bank estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults.
Adding to the headache, small and regional banks — the biggest source of credit to the industry last year — have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers.