Deutsche Bank : The not so small US commercial real estate "problem"

Discussion in 'Wall St. News' started by ASusilovic, Nov 16, 2009.

  1. Last week, the Federal Reserve Bank of Atlanta president Dennis Lockhart spoke of a `feedback loop’ between US commercial real estate, regional banks and unemployment — something so acute it could derail the country’s economic recovery.

    Thanks to Deutsche Bank’s fixed income team, we can now present the problem in pictorial form.

    First though, a bit of comment from the FI analysts:
    . . . Small regional banks have a disproportionate exposure to CRE . . . Moreover, unlike for residential real estate, the best assets have been securitized in CMBS, and banks tend to hold in their loan portfolio the riskiest assets. Also, the downturn in commercial real estate has started later than the downturn in residential real estate and as a result loss recognition to date is likely to be low. Finally, the CRE sector is more likely to be prone to a “Japan-type” resolution, i.e. one in which banks will delay loss recognition and possibly modify loans that are fundamentally insolvent.

    Here’s the table:

    US banks' exposure to CRE, by type - Deutsche Bank


    So what?, you might say. These are all small, systemically unimportant institutions.

    You’d be right, of course, but “systemically important” or not, they do have a sizeable impact on the US economy. As Deutsche notes, echoing Lockhart:
    As pointed out by Lockhart, smaller regional banks are the key providers of loans to SMEs. As a result, it is not surprising to see that the change in new credit to SMEs (what our economists call the credit impulse) has not recovered in the same way as credit for households or larger corporations.

    Finally, and as also pointed out by Lockhart, the SMEs sector is critical for job creation as small firms have accounted for a disproportionate amount of job losses this recession relative to the previous one. The divergence between SMEs and larger companies could be one of the drivers behind the widening gap between the unemployment rate (obtained from a household survey) and the NFP (obtained from a sample of companies) over the last few months.