The commercial real estate industry in the United States is facing the biggest risk of collapse since 2008, which could result in losses of up to $160 billion for Bank of America.
This is the conclusion drawn by researchers from the University of Southern California, Columbia University, Stanford University, and Northwestern University in a new working paper that evaluates the impact of long-term high interest rates on the commercial real estate industry and the US banking system.
It is reported that the paper used a framework developed earlier to study the aggressive interest rate hikes taken by the Federal Reserve to curb inflation. This cycle of rate hikes has lowered assets such as stocks, bonds, and commercial real estate.
The report concludes that if 10% -20% of commercial real estate loans default (which is the low end of expected default rates during the financial crisis), US banks may suffer losses of approximately $160 billion.
"This evidence suggests that if interest rates continue to rise and real estate value does not recover, default rates may reach levels comparable to or even higher than during the Great Recession," the researchers wrote.
In fact, other experts have also warned about the troubles in the commercial real estate sector, as the industry has approximately $1.5 trillion in debt that will mature in the coming years. The prospect of further losses has raised concerns about another bank run, similar to the Silicon Valley Bank (SVB) explosion that occurred earlier this year.
In this work report, researchers estimate that losses related to commercial real estate may lead to the bankruptcy of 31 to 67 smaller regional banks, assuming that half of the uninsured depositors clear their accounts. Another 340 banks may face losses due to rising interest rates.
"If this problem with commercial real estate loans becomes apparent in early 2022 when interest rates are low, then even in our most pessimistic scenario, no bank will fail. However, our research shows that after the Federal Reserve's aggressive interest rate hikes, the significant decline in bank asset values severely weakens banks' ability to withstand non-performing credit events. This exposure makes banks more susceptible to significant solvency risks." The report added that.
Investors have always been concerned about the stability of the US banking system. In August of this year, rating agency Moody's downgraded the credit ratings of 10 large and medium-sized banks in the United States, and included another group of banks in the review list, partly due to rising asset risks.