What's going on?
Big U.S. banks survived an assumed 40% drop in commercial real estate (CRE) values as part of the Federal Reserve's annual health test, easing some concerns about the banking sector amid high interest rates that are plaguing landlords.
What does this mean?
The Fed's stress tests ensure banks can withstand tough economic times, and this year's results show that big banks can absorb losses of around $685 billion. This includes scenarios such as a 36% drop in U.S. home prices, a 55% drop in stock prices and a 10% unemployment rate. While these results are reassuring, they come against the backdrop of office vacancy rates hitting a record high of 20% due to pandemic-era remote work practices. Though these banks passed, Janney Montgomery Scott's head of research warns that the CRE sector's challenges are far from over.
Why should you care?
For the market: Navigating CRE disruption.
Goldman Sachs, RBC USA, Capital One and Northern Trust had the highest expected losses on commercial real estate loans, ranging from 13% to nearly 16%. Despite high capital reserves, they face concerns about $929 billion in commercial mortgage maturities in 2024 amid continuing declining property values and low rents. The test excludes less-regulated regional banks, which hold the vast majority of commercial real estate loans, adding further uncertainty for investors.
The big picture: Overall, stress in this sector remains persistent.
The stress tests, conducted more than a year after the collapse of mid-sized lenders including Silicon Valley Bank and First Republic, highlight not only the resilience of big banks but also increased scrutiny of financial stability. Analysts argue that the real test is for regional banks, which are not included in the Fed's assessment. With $4.7 trillion in commercial mortgages, most of which are due to mature soon, the sector's troubles may only just be beginning.