Bad CRE Loans Still Pose Risk To Banking Sector, FDIC Reports
In its quarterly report on the health of U.S. banks, the Federal Deposit Insurance Corp. said on Thursday that commercial real estate loans still pose a significant risk to the banking industry as the total of noncurrent CRE loans creeps up.
“Ongoing economic and geopolitical uncertainty, continuing inflationary pressures, volatility in market interest rates, and emerging risks in some bank commercial real estate portfolios pose significant downside risks to the banking industry,” FDIC Chairman Martin Gruenberg said in a statement.
Gruenberg also said that the banking industry nevertheless continued to show resilience “after a period of liquidity stress in early 2023,” a reference to the large failures of Silicon Valley Bank and Signature Bank about a year ago.
Noncurrent bank loans, those that are 90 days or more past due, edged up to 0.86% of total loans in Q4 2023, or four basis points higher than the previous quarter, according to the FDIC. Loans that were 30 to 89 days past due increased seven basis points to 0.61%. Those delinquency rates were both below pre-pandemic averages for each category.
CRE loans drove the quarterly increase in the noncurrent rate, while residential mortgages drove the quarterly increase for loans 30-89 days past due, the agency reported.
The FDIC also said that its count of banks with financial or other weaknesses is now 52, up eight from Q3, and representing just over 1% of all banks. Those banks hold about $66.3B in assets, up $12.8B for the quarter. The agency tallies the number of banks it considers weak but doesn't publicize which they are to prevent runs on those institutions.
So far this year, no U.S. banks have failed. Five failed in 2023, including SVB and Signature, with a total of $548.7B in assets, which topped the $373.5B in bank failures in 2008, even accounting for inflation. No banks failed in either 2021 or 2022.
Other banks are probably going to fail because of CRE exposure, Federal Reserve Chair Jerome Powell said Thursday, speaking before the Senate Banking Committee.
“This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” he said. “It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues.”
Powell also said that the central bank is "not far" from the confidence it needs to start cutting interest rates, though he offered no timetable. The next meeting of the Federal Open Market Committee, which sets rates, is later in March.
