Bad loans in the commercial real estate (CRE) industry have begun to exceed the loss reserves set aside by institutions such as JPMorgan Chase & Co.
The findings, revealed by the Financial Times on Tuesday, are based on data from the Federal Deposit Insurance Corporation (FDIC).
Loss Reserves Now Barely Cover Troubled CRE Loans
Historically, banks have maintained reserves to cover potential losses on loans that go bad. However, the past year has seen a stark deterioration in these safety nets.
The average reserves for the aforementioned banks have decreased from $1.60 to just 90 cents for every dollar of commercial real estate debt that is at least 30 days late. This decline in reserves comes at a time when delinquent debt for these six large banks has nearly tripled, reaching $9.3 billion.
The ratio of loss reserves to delinquent loans has dropped below 1 for Bank of America, Citigroup, Goldman Sachs, Wells Fargo, and Morgan Stanley. In contrast, JPMorgan has also decreased its ratio but still maintains it well above 1, according to the data.
Michael Barr, responsible for bank supervision at the US Federal Reserve, emphasized the heightened attention regulators are paying to banks' CRE lending practices.
The focus is on how risks are reported internally, the appropriateness of provisions for potential losses, and whether banks hold sufficient capital to withstand future CRE loan losses.
This scrutiny comes against the backdrop of the wider banking sector witnessing a more than doubling in the value of delinquent loans tied to commercial properties, escalating to $24.3 billion from $11.2 billion the previous year.
While some banks assert their preparedness to CRE turmoil, pointing to previously higher-than-necessary reserves, others in the industry, including Richard Barkham of CBRE Group Inc.
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