Banks Stand To Lose $48B On CRE Loans

The largest U.S. banks might lose as much as $47.6B on commercial real estate loans over the next two years, according to the Federal Reserve's latest stress test results. The tests, which were mandated by the Dodd-Frank Act of 2010, are done annually.

flighty dollars

The Federal Reserve required 33 major financial institutions to participate in the stress tests this year, with the tests estimating losses in commercial real estate as well as first and second residential mortgages, business loans, credit cards and other consumer finance products.

The $47.6B figure would be spread across the 33 banks under a worst-case scenario, which the central bank calls its "severely adverse scenario."

The severely adverse scenario would involve severe global recession as well as a period of heightened stress in CRE and corporate debt markets. Among other adverse metrics under the scenario, U.S. GDP would contract as much as 10%, unemployment would remain at 10% well into 2021 and the Dow Jones Industrial Average would lose all of the gains it has made since before 2014, the Fed said.

The stress test estimated the financial institution that would suffer the highest CRE loan losses under that worst-case scenario would be Wells Fargo & Co. at $10B. Bank of America Corp. and JP Morgan Chase & Co. would lose $4.9B and $3.8B, respectively, and Truist Financial Corp. would lose $3.3B.

Most banks would lose $2B or less. Banks with no commercial real estate losses under the worst-case scenario include American Express Co., Barclays US, Credit Suisse Holdings (USA) and Discover Financial Services.

The main goal of the stress tests is to determine a bank's capital buffer, which is the difference between its capital level at the beginning of a scenario and what it has left afterward. The lower the capital buffer, the better the bank did on the stress test, American Banker reports.

Altogether, the stress tests estimated that banks would take a hit in a severely adverse scenario of $432.5B, which represents a collective portfolio loss rate of 6.3%. The banks would thus suffer, but the latest stress test didn't find that any of the institutions are in existential danger for now.

For many banks, commercial real estate loan losses would be relatively small compared to other kinds of losses, at least under the worst-case scenario.

Bank of America, for instance, stands to lose $15.3B on business loans, three times its CRE losses, and Capital One and Citigroup each would lose roughly $27B from their credit card lending, compared with a loss of $1.3B each from bum CRE loans.

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