The commercial real estate disaster of the early 1990s taught Australian bankers a harsh lesson about the dangers of having an excessive exposure to that part of the property market at a time of rising interest rates.
But it has also sparked a growing apprehension about the outsized exposure of small and mid-sized US lenders to commercial property loans, as the steep rise in US interest rates has pushed property valuations lower. Unfortunately, the outsized exposure of fragile lenders to a troubled sector creates the perfect conditions for a “doom loop” to emerge, where efforts by small lenders to cut their exposure only exacerbates commercial real estate problems, which increases the banks’ woes.
Now, these growing signs of commercial real estate distress suggest that lenders to the sector – particularly the small and mid-sized banks – are about to face a sharp increase in problem loans, which will translate into significant write-offs.To protect themselves from possible deposit flight, bank executives will try to boost liquidity levels. And this means cutting back on lending.