Interview, Fireside Chat
Regional banks back in focus on real estate concerns
- Ryan Nash of Goldman Sachs characterizes current regional bank concerns as a byproduct of the 2023 crisis rather than a repeat, citing a shift from a "hard landing" macro environment to a "soft landing" context.
- Failed banks in 2023 exhibited three specific failure modes: highly illiquid assets sold at significant losses, sophisticated depositor bases with minimal uninsured deposit protection, and insufficient short-term liquidity to absorb outflows.
- Current stress is described as idiosyncratic, affecting one or two specific institutions that have grown large enough to trigger heightened regulatory thresholds within niche markets.
- The residential real estate sector is not currently viewed as a primary risk driver for regional banks, as low interest rates have facilitated refinancing for many homeowners.
- Commercial real estate (CRE) office loans face persistent headwinds due to lagging return-to-office mandates and higher interest rates impacting debt service and asset values.
- Goldman Sachs expects CRE-related losses to continue for several years, though the industry maintains sufficient reserves to absorb them.
- Multifamily real estate is identified as a cyclical concern with potential for higher losses in specific sub-sectors, such as rent-stabilized properties affected by inflation and debt service pressures.
- Despite multifamily challenges, broader U.S. multifamily values have risen due to housing shortages, wage growth, and population shifts in developing markets.
- Credit risk exposure to commercial real estate is skewed toward smaller institutions; approximately 70% of the industry's CRE loans are held by banks with assets under $150 billion.
- Banks below $100 billion in assets hold roughly 25% of their loan portfolios in commercial real estate, compared to only 13-14% for banks above $100 billion.
- Specific risk breakdown within regional banks includes 6% exposure to multifamily loans and 3% to office loans, with the majority of higher-risk exposure concentrated in the smaller bank tier.
- Banks that faced stress previously held CRE loan loss reserves significantly below industry averages, specifically 2% for office loans (versus a 7% average) and 40 basis points for multifamily (versus a 1.5-1.75% average).
- Goldman Sachs anticipates 2024 credit losses to be higher than 2023 levels but not "outsized," maintaining a positive outlook for net interest income bottoming and top-line growth.
- The firm is monitoring the stabilization of regional bank stock prices, noting the KRE index is currently down approximately 10%.
- Potential mitigation actions for stressed institutions include asset sales, capital raising, and utilizing liquidity facilities such as the Bank Term Funding Program (BTFP) and the discount window, which remain accessible.
- Funding competition among regional banks has eased recently, contrasting with the step-function increase in funding costs observed during the 2023 crisis.
- The discussion highlights that social media's speed and influence on bank runs remain a critical variable for short-term monitoring.