Moody's: "US SVB Bank Crisis May Spread to the Entire Economy"

Concerns Over Commercial Real Estate Crisis

International credit rating agency Moody's has issued a warning that the financial risks triggered by the collapse of the U.S. Silicon Valley Bank (SVB) could spread to other economic sectors. Concerns are also growing that the crisis may extend to the U.S. commercial real estate market.

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According to major foreign media on the 23rd (local time), Moody's stated in a report released that day, "The financial and economic damage could be greater than expected."

Moody's suggested three scenarios in which banking risks could spread to other sectors, noting that "U.S. financial authorities may fail to contain the current turmoil without long-term and severe impacts inside and outside the banking sector."

First, the worst-case scenario is that risk aversion spreads throughout the entire financial sector, causing banks to reduce lending. Moody's predicted, "Financial conditions will remain tight throughout this year, and growth will slow, exposing various sectors and companies already facing credit issues to increased risks."

Next, a scenario was identified where the crisis spreads directly or indirectly to companies and institutions exposed to banks experiencing liquidity crises like SVB. The risk could be transmitted through companies that have deposit transactions with these banks or hold their bonds and stocks.

Lastly, a scenario was presented in which policymakers fail to effectively manage the banking crisis, leading to widespread contagion. For example, this could occur if government authorities focus solely on inflation. However, the report analyzes that the government’s crisis response is likely to be successful.

Concerns are also growing that the commercial real estate market, closely linked to the small and medium-sized banks at the epicenter of this financial crisis, could be severely impacted. Banks account for half (50.6%) of the $5.6 trillion U.S. commercial real estate market loans, with small and medium-sized banks holding 67% of that share. There is worry that if the already contracted commercial real estate market?shrunken due to high interest rates and the spread of remote work caused by COVID-19?faces a liquidity crunch, a megaton-scale crisis could occur.

Jong Shin, a JPMorgan analyst, said, "The collapse of SVB is putting a spotlight on regional banks," adding, "The commercial real estate loan books remain a major concern." He warned, "The contraction of lending by small banks could lead to credit tightening in commercial real estate for second- and third-tier banks."