Deprcon Warning

The third wave of the banking crisis looms (+deposit withdrawal warning)

Analysts have finally started to raise the alarm on banking issues related to the collapse of the U.S. commercial real estate (CRE) sector. Our CEO, Tuomas Malinen, flagged the sector as the next likely ‘shoe to drop’ already after the collapse of the First Republic Bank in April.

German property financer, Aareal Bank, has seen its bond price collapse due to its heavy exposure to U.S. CRE, while Deutsche Pfandbriefbank, who is also heavily invested in U.S. CRE, is experiencing heavy credit stress. This is a ‘canary’ of deeper issues, and losses, brewing in European banks.

In addition to issues going back to the 2008 crisis, European banks are struggling both with loan losses tied to the U.S. CRE and with those related to the collapse of the real estate sector in some European countries, like Germany. Moreover, the continent is facing a threat of an imminent recession. These imply that a crisis can engulf the European banking sector, practically, at any moment. Moreover, while the U.S. banks managed to improve their financial positions somewhat in Q4 (Tuomas will write about this later), their exposure to CRE is highly unevenly distributed.

This is why we issue a warning on the re-surfacing of the banking crisis. We also map the banks most vulnerable to the CRE collapse, based on Q4 data. Based on it, we issue an immediate withdrawal warning for four U.S. banks, while we flag 42 U.S. banks for withdrawal consideration.

The U.S. banks most exposed to CRE

We will publish two lists of banks, with 90 U.S. banks each. First, we list those banks who have the highest exposure to CRE. Second, we list the banks who would take the heaviest hit to their equity, if CRE loan losses would reach 10%, which can be considered something of a ‘consensus estimate’.

We will publish several loan loss scenarios based on Q4 data, including alternative loan loss scenarios on CRE, in the near future. We are also in the process of rooting out the banks who have been likely to tap into the Bank Term Funding Program (BTFP) of the Fed.

Here’s the first listing of banks with the highest exposure to CRE. This is an update and extension to the list we published in early February.