Mar 4, 2024 - Economy

Lessons from last year's banking crisis; "like being chased by a bear"

illustration of Benjamin Franklin peeking out from behind a classical column

Illustration: Lindsey Bailey/Axios

Regional banks are back on investor radars.

Why it matters: A year after the collapse of Silicon Valley Bank (and subsequently Signature and First Republic banks), smaller lenders' balance sheets are under scrutiny for their exposure to the commercial real estate market.

State of play: Regional and smaller banks hold roughly 80% of commercial real estate loans, according to data firm Trepp.

  • They're facing trouble collecting from developers as office vacancy hits a record, leases expire and property values fall.
  • Delinquencies on commercial mortgages backed by U.S. office properties hit 5.8% in December, the highest in nearly seven years, Axios has reported.

Reality check: The poster child for the current moment is New York Community Bancorp, whose stock's been in free-fall since its Jan. 31 earnings.

Confidence rules all in banking, however — and a loss of confidence was one of the reasons for the historic bank run on SVB last year, leading to its failure.

  • Dominic Ng, CEO of East West Bank, now the largest California-chartered bank, had a front row seat to that last year.

What they're saying: Defending his company from the contagion of fear was like "being chased by a bear," Ng says he likes to joke.

  • To outrun the bear, he told Axios, East West had to "somewhat overreact and over respond."
  • That meant over-communicating to even its most loyal customers, and in some cases waiving fees and paying up on interest rates.

The big picture: It's not yet known what the actual magnitude of losses from commercial real estate will mean for lenders in the coming months. And some pockets of the market remain strong.

  • "While there is and will continue to be obsolete office, the office is not obsolete," Ermengarde Jabir, Senior Economist at Moody's Analytics, recently said.
  • Shopping centers and multifamily properties are expected to perform well, while warehouse and distribution buildings are reaching a new steady state of growth.

What we're watching: The commercial real estate market is very rate sensitive, Tracy Chen, a portfolio manager at investment management firm Brandywine Global, tells CNN.

  • "Even a marginal reduction of interest rates should be a tremendous help in lifting sentiment."
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