KBRA Financial Intelligence

CRE Bank Stress, Ethan’s Take on Bank Supervision and Crisis Timeline

The struggling office market is likely one of the next risks to impact regional lenders, following a bank run last month that sparked the biggest financial crisis since 2008, according to policymakers and investors. Banks with assets from $1 billion to $10 billion have the most exposure to commercial real estate (CRE), according to data compiled by KBRA Financial Intelligence (KFI), a division of KBRA Analytics. Lenders outside the top 20 in assets hold almost 76% of all CRE bank loans.

The post-pandemic office market is nowhere near recovery as companies rethink how often their employees need to come in to work. Occupancy rates have hovered around 50% of pre-pandemic levels so far this year, according to Kastle Systems, which tracks employees swiping in and out of office buildings.

Landlords are also struggling to lure tenants to older buildings across the U.S., according to a March report from KBRA Credit Profile (KCP), which monitors stress in commercial mortgage-backed securities (CMBS). About $119 billion in loans tied to CMBS are set to mature in the next 12 months, according to KCP data.

Federal Reserve officials discussed vulnerabilities in elevated CRE valuations amid higher interest rates, according to Fed minutes released in February. The Fed has raised rates more than 4% since last spring from near zero, making refinancing certain commercial loans unprofitable.

Real estate executives are warning of economic pain ahead. Scott Rechler, CEO of property manager RXR, said on Twitter that CRE may have systemic problems after years of low rates and higher values.

"We have been experiencing a proverbial slow-moving train wreck that has been picking up speed throughout this past year with the unprecedented spike in interest rates," Rechler said in a March 22 tweet.

The Real Estate Roundtable, a trade group, asked regulators in March to establish a troubled debt restructuring program that would give banks flexibility in refinancing commercial loans with borrowers and lenders. Brookfield Corporation opted to default on loans tied to two downtown Los Angeles office buildings in February, rather than extend maturities.

White House Seeks Tougher Rules for Regional Banks

The White House is seeking to reinstate bank rules for midsize lenders that were rolled back under the previous administration, following the biggest bank failures since the financial crisis.

Under the proposal, banks with $100 billion to $250 billion in assets would need to hold more capital and liquid assets, face regular stress tests, and submit a "living will" that details how they can be wound down, the White House said in a March 30 statement . Federal bank regulators can implement the changes without congressional approval.

Recent Research

Access complimentary bank research with a KBRA.com login. Don’t have one? Sign up here.

March’s Bank Treasury Newsletter

In his latest analysis, veteran bank analyst Ethan Heisler explores what kind of bank supervisory changes may be considered in the wake of recent events: "Though no announcements have been made yet, many bank treasurers believe that existing accounting, regulatory capital, and liquidity rules will be reconsidered as a result of the bank failures this month." Read more.

Banking Crisis Timeline A bank run sparked the biggest bank failure in 15 years. We provide a timeline below of how the collapse of Silicon Valley Bank (SVB), a major lender to start-ups, precipitated a crisis of confidence.

• March 8: SVB reports a $1.8 billion loss after selling bonds below par after depositors pulled their cash. The bank parked billions in deposits in safe but low-yielding U.S. Treasurys, but the value of those investments eroded with aggressive interest rate hikes by the Federal Reserve.

• March 9: SVB’s stock plummets, sending shares of all lenders down, including megabanks such as JPMorgan Chase and Bank of America. By the end of the day, SVB depositors tried to pull $42 billion.

• March 10: Federal and state bank regulators announce they have taken over the Santa Clara, California-based lender before it could open that Friday morning. SVB, which had more than $200 billion in assets, is the second largest bank failure in U.S. history, after Washington Mutual in 2008.

• March 12: To shore up bank liquidity, the Department of the Treasury, Fed, and FDIC announce a new lending facility where depository institutions could pledge collateral such as Treasurys to receive loans of up to one year. The regulators also announce the takeover of Signature Bank, marking the third-largest bank failure in U.S. history.

• March 15: Credit Suisse shares plunge after the chairman of the Saudi National Bank, the bank’s largest shareholder, said it was not interested in increasing its stake. Later that night, the Swiss central bank said Credit Suisse would borrow about $54 billion to bolster its liquidity.

• March 16: Federal regulators announce that First Republic Bank, whose shares had plummeted since the start of the crisis, would receive $30 billion from the large banks to boost its liquidity.

• March 17: The capital infusion fails to sway investors. First Republic shares plummet. Credit Suisse also declines despite the pledge from the Swiss National Bank.

• March 19: UBS agrees to take over 166-year-old Credit Suisse for $3.2 billion in a deal backed by Swiss regulators. The FDIC announces later that New York Community Bancorp would buy Signature Bank’s deposits and loans but not its CRE loan portfolio.

• March 21: Shares of First Republic and other regional banks jump after Treasury Secretary Janet Yellen said the government is willing to protect other bank deposits if needed.

• March 27: First Citizens announces it will acquire most of Silicon Valley Bank’s assets. Regional bank shares begin to steady.

• March 30: The White House proposes tougher rules for regional banks, including holding more capital and liquid assets, facing regular stress tests, and submitting a living will.

Follow Van Hesser's Podcast & Insights

Follow KBRA’s weekly podcast and newsletter, 3 Things in Credit, hosted by our Chief Strategist, Van Hesser. From the March 31 episode:

"For credit to break here, really underperform, we would need significant contagion of financial instability (not likely), a spike in unemployment (not likely), a significant drop in earnings growth (not likely), or a spike in inflation (not likely)."