FDIC Data... 6 Major Banks' CRE Delinquency at $9.3 Billion
"Need to Realize Loan Loss Reserve Ratio"
Last year, the amount of commercial real estate loan delinquencies at major U.S. banks more than tripled, while loan loss reserves decreased. Unlike small and medium-sized banks such as New York Community Bancorp (NYCB), large banks, which are considered relatively safe, are also exposed to the risk of commercial real estate loan defaults, prompting calls for stricter capital regulations.
On the 20th (local time), major foreign media outlets reported, based on an analysis of data from the U.S. Federal Deposit Insurance Corporation (FDIC), that the six largest U.S. banks (JP Morgan, Bank of America (BoA), Wells Fargo, Citigroup, Goldman Sachs, Morgan Stanley) reduced their loan loss reserves per dollar of commercial real estate loans delinquent for more than 30 days from $1.60 in 2022 to $0.90 in 2023.
Loan loss reserves are amounts banks set aside as expenses in preparation for situations where loans cannot be recovered. The fact that the reserve amount is smaller than the delinquent loans means that if loans overdue by more than 30 days become fully non-performing, the current reserves will not cover the losses. Over the past year, loan delinquencies at these six banks increased by more than three times to $9.3 billion, while loan loss reserves decreased.
For the entire U.S. banking sector, loan loss reserves per dollar of delinquent commercial real estate loans decreased from $2.20 in 2022 to $1.40 in 2023. Although this is more comfortable than the six major banks, it is the lowest level in the past seven years. This is due to the impact of commercial real estate loan delinquencies doubling to $24.3 billion in one year.
Bill Moreland of BankRegData said, "There is no doubt that loan loss reserves should be much higher," and predicted, "Banks that looked fine six months ago will not look so good next quarter."
Banks should increase loan loss reserves to improve soundness, but they tend to delay setting aside reserves due to concerns about deteriorating profitability. Financial authorities also require reserves to be based on past loss rates, so recent commercial real estate downturns have not been reflected in bank capital regulations. This gap could trigger a potential soundness crisis for banks. Currently, financial authorities require loan loss reserves of 10% for unsecured loans such as credit card loans and 2-3% for commercial real estate loans with low default risk.
Zhao Granza, an accounting professor at the University of Chicago Booth School of Business, said, "At some point, if vacancy rates remain high, property owners will be unable to repay loans, and banks will initiate foreclosure," adding, "Although historical loss rates are low, banks should not rely solely on past data but also assess whether they have predicted expected future losses."
Richard Barkham, Global Chief Economist at CBRE, a commercial real estate company, warned, "The decline in loan loss reserves is fundamentally wrong behavior," and said, "According to BankRegData, commercial real estate loan losses at banks could increase to $60 billion within the next five years, double the current loan loss reserves of $31 billion."
Large banks maintain that despite the increase in commercial real estate delinquencies and the decrease in loan loss reserves, there are no issues with their soundness. BoA explained that as of December last year, the amount of commercial real estate loans with decreased collateral value was $5 billion, which is a very small portion compared to the bank's total assets of $3.2 trillion and revenue of $30 billion.
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