Emergency lending by the US federal authorities has bathed America’s struggling regional banks in short-term liquidity, disguising the slow-burn damage of the US commercial property slump.

A sobering analysis by four of the country’s leading finance experts says this comfort blanket has created a beguiling illusion of stability. The underlying crisis in the banking system continues to deepen as $US5 trillion ($7.4 trillion) of commercial real estate debt taken out during the zero-rate era comes due in tranches.

The fall in asset values for commercial property could be significant.Credit: Bloomberg

“It’s not a liquidity problem; it’s a solvency problem,” said Professor Tomasz Piskorski, a banking specialist at Columbia University, and one of the lead authors. “Temporary measures have calmed the market, but half of all US banks are running short of deposits with assets worth less than their liabilities, and we are talking about $US9 trillion,” he said.

“They are bleeding capital and could not survive if something triggers a sudden loss of confidence. It is a very fragile situation and the Federal Reserve is watching it closely”.

The Fed’s pre-Christmas pivot in monetary policy – along with a 100 point drop in 10-year US Treasury yields – mitigates the stress but comes too late, and is too tentative, to avert mounting insolvencies.

Property developers must refinance their debts into the most hostile lending market in living memory, while falling rents and soaring insurance costs are eroding their revenue streams. Almost $US1.5 trillion comes due by the end of next year.

“The entire commercial real estate space has to be reset. No one really knows where the values are,” said Scott Rechler, chairman of Long Island developer RXR and a board member of the New York Fed.

Rechler said lenders are only just starting to capitulate and mark down loans. “As an industry, we’re in the first innings of what’s going to be a long game,” he said.

QOSHE - Fed rate cuts come too late to avert a fresh wave of US bank failures - Ambrose Evans-Pritchard
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Fed rate cuts come too late to avert a fresh wave of US bank failures

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09.01.2024

Emergency lending by the US federal authorities has bathed America’s struggling regional banks in short-term liquidity, disguising the slow-burn damage of the US commercial property slump.

A sobering analysis by four of the country’s leading finance experts says this comfort blanket has created a beguiling illusion of stability. The underlying crisis in the banking system continues to deepen as $US5 trillion ($7.4 trillion) of commercial real estate debt taken out during the zero-rate era comes........

© The Sydney Morning Herald


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