Big and Small Banks Head in Opposite Directions on CRE Lending
The smaller banks are growing loans and large deposits; the larger banks have become more cautious and are holding more cash.
Concerns about U.S. commercial real estate lending are everywhere. BlackRock thinks that borrowing costs will be 5.5% in the long term. Banks keep tightening lending standards, increasing the difficulty for many to get needed financing.
And recently the Financial Stability Oversight Council — a collection of all the major federal bank regulators — created an “analytic framework” for nonbank financial security risks. Not surprising, said some sources to GlobeSt.com, because nonbank lenders have been taking over for where banks have fallen short.
But that leaves the question of what exactly is happening with the banks. The immediate answers would seem to be the standard ones. Overindulgence in long-term bond assets with very low yields and, so, very low values. Books of commercial real estate loans of growing questionable value and properties don’t get refinanced. Concerns about regulators creating pressure to reduce lending to help cool the economy.
According to Steven Blitz, chief U.S. economist and managing director of global macro for TS Lombard, the banking industry is seeing small and large banks moving in two opposite directions.
Since March, the ratio of large deposits to totals have been growing, “from just under 10% of total deposits in March to over 12% and loans are rising relative to cash and UST [U.S. Treasurys].” But also, “UST remains 4.5% of total assets at small banks and reserves have dropped from 7.6% to 6.7% of assets.” Loans have gone from 65% to 68% of assets. Overall, the big banks are adding more cash to their assets and small banks are lending more.
He further noted that the problem the small banks had was the large ratio of big deposits relative to their total and a big possession of U.S. Treasurys with those low interest rates and, so, low prices. Deposits are liabilities to a bank because they belong to the depositors and banks must be able to return them on request.
“The short story for banking since March is that small banks are still growing loans and large deposits while large banks have turned more cautious, especially since the sharp rise in longer-term yields took hold,” Blitz wrote. “Small banks are consequently more vulnerable to a credit event, even though they are better capitalized than they were in 2007, let alone pre-Covid.”