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Bad property debt exceeds reserves at largest US banks
- globalise83 3y agoSigns of impending financial crisis?
- betaby 3y agoAnother wealth transfer, yes.
- fundad 3y agoHopefully it’s a correction. The banks get a little smaller but it’s a huge opportunity. Once these properties are written down and sold to residential developers, we can add more units and make cities more livable.
- betaby 3y agoNot going to happen in any meaningful scale. Absolutely not in Canada and perhaps on some degree in US. Media is already conditioning population about that in Canada.
- cmur 3y agoI wish this could work out as well as it seems it could, but it’s not nearly as easy or flowery as a residential developer picking up an office building. A friend of mine in the space pointed out even though these spaces have a lot of floor space, plumbing is your main issue on converting these structures into livable spaces. Most of these spaces only have 1-2 bathrooms a floor, meaning an apartment-style floor plan adjustment turns into a nightmare regarding piping.
- baq 3y agoConverting CRE into residential is easiest (and probably cheapest) done by tearing the whole building down and building it from scratch. Pretty much nothing in commercial is designed to handle needs of residential and you can't just add missing pipes, shafts, stairs, isolation, etc. to an existing building.
- smileysteve 3y agoNah, easiest is changing the definition of "residential" from family to individual - the sector that the US lost in the 70s now known as long term hotels. When you change this definition to - communal kitchen - communal bathrooms - no window access You solve many issues - college costs (by bringing back dormitories instead of every college kid having an apartment) - housing costs for early 20s that don't want to manage a whole apartment (and Uber eats 90% of meals) - a small degree of homeless that are similar to the category above (especially the temporary homeless) - baby boomer (now early gen x) "retirement" not quite to assisted living (yes, this group don't always need a private bathroom and kitchenette - when they have central dining halls)
- bequanna 3y agoYep. Commercial -> Residential conversion is far from easy. I'm active in a multifamily investor group and what I am hearing is that it is damn near impossible to make this work and actually cheaper to just build new multifamily vs convert.
- no_wizard 3y agoWhat if you change the narrative from "single family" home (or multi-family dwellings) to "cater to couples and/or singles that can handle needed compromises"
- bequanna 3y agoGood luck changing building regs to suit that. Also, it sounds like you’re proposing building adult dormitories. Is there any evidence people want that?
- fundad 3y agoPrivate sector isn’t positioned to accomplish this. You’re correct.
- fundad 3y agothe properties absolutely need to be written down to accommodate the cost of demolition. The businesses who overpaid and the banks that will repossess the buildings are obviously taking a hit and won’t fund this.
- madsbuch 3y agoThey do say the long real-estate cycle is 15-18 years. 2007 is 17 years ago. While I don't like that type of rule of thumb, I can clearly feel why it makes sense. I am on the brink of buying my first home as it is. And having seen peers having earned several hundreds of thousands from their houses over the past 4-5 years really adds pressure and FOMO. I guess that is the sign to be extra cautious on buying. And I also think that this feeling is quite prevalent creating the perfect storm for a financial crisis.
- ethbr1 3y agoWith regards to residential property, after watching the last 20 years I've decided demand is the music to valuation-musical-chairs. If demand falls, then prices go down. Otherwise, they track inflation (multiplied by desirability of the area you're looking in). Which basically means: buy in areas with growing populations, good economies, and good achool zones.
- bdw5204 3y agoNow is probably not the right time to buy because interest rates are at the highest levels in recent memory. Nobody in their right mind is selling right now unless they are being forced to out of financial desperation. The commercial real estate crisis is a different problem based on the pre-2020 assumption that it was a good investment because remote work would never be widespread.
- ethbr1 3y agoIf parent has access to US-style fixed-rate, refinance-without-penalty mortgages, the interest rate isn't a major component. Provided you can carry the payments, what do you care? Buying now: interest is deductible on itemized taxes, can refinance when rates drop, build any home value appreciation Buying later: your rent money is literally doing nothing for you, you've missed home value appreciation, and you need to pay more for a home in the future Systemic home valuation decreases is the bigger threat to watch for (i.e. keep an eye on prices:incomes, etc).
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- davidgerard 3y agoThe trouble with imaginary assets is that you can talk about them with a dollar sign on the front for years at a stretch - but you can only kite cheques for so long.
- someonehere 3y agoThere are more signs than we are being led to believe that something is coming. For example, Egypt has decided to ditch the US dollar and join BRICS. It’s a matter of time before things catch up with our economy.
- slv77 3y agoThe Federal Reserve is paying 5% interest on $7 trillion of reserves held by banks. Since this is in excess of what the Federal Reserve is earning on the assets on its balance sheet they are booking the difference as “deffered assets”. Little of this needs to trickle down to retail depositors given the Federal Reserves “ample reserves” policy so this is effectively a bank subsidy. For all the talk of the Fed “printing money” this is literally printing money because there is no offsetting asset on the Feds balance sheet. Eventually the hole in the balance sheet is supposed to be closed by interest earned that would normally be paid to the US Treasury. In other words the Federal Reserve has figured out how to directly bail out banks without the consent of Congress to the tune of $10B+ per month. The higher they raise interest rates, the bigger the subsidy. That should leave a lot of banks well capitalized to pick up assets of small regional banks and REITs that will eventually fail. Roughly $10B in bank subsidies can translate into $100B in loans with required 8% capital ratios. The Federal Reserve considers their “ample reserve” policy a “public good” as in it is good for the public to see savings eaten away by inflation and higher public debt burden of interest payments to subsidize banks.
- JumpCrisscross 3y ago> Federal Reserve is paying 5% interest on $7 trillion of reserves held by banks This was sanctioned by the Congress in 2008. And the banks could earn more in the interbank market. That’s why the Fed pays that interest: to keep those excess reserves out of the market.
- fnordpiglet 3y agoNo, this is a sign of the system built after the last financial crisis functioning. It’s also a sign of the clickbait industrial complex functioning.
- k2enemy 3y agohttps://archive.is/VbOBj https://archive.is/VbOBj
- brudgers 3y agohttps://archive.ph/VbOBj https://archive.ph/VbOBj
- Bostonian 3y agoI cannot access the article. If the Federal Reserve thinks the banking system is imperiled, it will cut interest rates and loosen credit enough to reduce the amount of bad property debt to tolerable levels. This would be inflationary, though.
- sampa 3y agoyes, "money printer go brr" moment is coming this is the only thing governments all over the world are going to do when everything falls apart
- bequanna 3y agoHard to see things going that way. We've just started to rein in inflation. I don't think anyone (Fed, politicians, or the public) has the stomach for more QE.
- sampa 3y agowhen the banks fall and the system is collapsing, this is their only answer see 2008, 2020
- bequanna 3y agoThis is a very bold prediction. Given how aggressively we expanded the money supply just a few years ago, mass bank failures seem quite unlikely as asset price increases generated quite a bit of equity leaving plenty of buffer room for loan defaults. Still plenty of liquidity out there. Commercial real estate is not a systemic threat.
- deleted 3y ago[deleted]
- rinze 3y agoI told you you should all go back to the office for the culture and the interpersonal relationships. Now you got this.
- passwordoops 3y agoGood one (for real, it made me chuckle) but really it's "I told you we should reinstate all the banking and financial restrictions that came into force in the 1930s because financiers and bankers can't be trusted to regulate themselves. Now we got this"
- delichon 3y agoI told you that "too big to fail" bailouts are a recipe for bigger failures downstream. Now I hope I was wrong.
- chefandy 3y agoThere’s no need for more regulation— this is working as intended. It will all be worked out by the checks and balances inherent to modern American capitalism. That is, when the banks’ balances are low, the government writes them huge checks to cover it. See? No need to panic: The market always does what’s right in the long run for bank shareholders and executives.
- passwordoops 3y agoI wonder how many likes you'll get from people who only pay attention to your opening line :)
- chefandy 3y agoI'd love to see the responses people started writing but then deleted after reading the whole comment!
- deleted 3y ago[deleted]
- akomtu 3y ago[flagged]
- disgruntledphd2 3y agoWhile I don't disagree in principle, the FT make the vast vast amount of their revenue from subscriptions, and they're the least click-baity of all the major newspapers (IMO, at least).
- zinekeller 3y agoAs mentioned, the Financial Times does not really rely on advertising (their advertising is limited only to their physical paper, their website is paywalled and does not contain advertisments as far as I see).
- Freedomboy 3y ago[dead]
- no_wizard 3y agoI want to see this play out without government intervention. If banks need to take losses, so be it. This needs to be unfettered and not be an excuse to lower interest rates. The TARP bailouts showed all of us that bailing out banks in bad situations does little to help the average citizen anyway. Let them take the losses. Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
- onlyrealcuzzo 3y ago> If banks need to take losses, so be it. Then the government is bailing out with FDIC, plus the economy explodes. It's not as sexy as it sounds.
- Spivak 3y ago> Then the government is bailing out with FDIC. At least then it's bailing about depositors.
- deleted 3y ago[deleted]
- toomuchtodo 3y agoIt’s not supposed to be sexy. It’s avoiding moral hazard. Eventually, you have to let poor risk management fail.
- generic92034 3y agoBeware the domino effect, though.
- toomuchtodo 3y agoEdit: What AnimalMuppet said. FDIC is backstopped by the Fed and participant banks. There is no hard limit anywhere. Make depositors whole, good luck to everyone else. If you’re exceeding FDIC insurance limits as a depositor, you should fix that, today. If you have exposure to at risk asset classes, you’re already exposed, you’re just waiting for prices to catch up to reality.
- HPsquared 3y agoA ratio of 100% is a fairly meaningless figure. Nonperforming loans don't have a value of zero.
- legulere 3y agoThey don’t need to have a value of zero for banks to not be able to pay their creditors.
- fnordpiglet 3y agoExcept loan reserves have nothing to do with that and is a balance between working capital and reserve. They just adjust the reserves higher. This is literally the system working as intended written with a headline to collect clicks for profit.
- JumpCrisscross 3y ago> a headline to collect clicks for profit The Financial Times doesn't bait for clicks. It's written for subscribers who should understand the difference between reserves and capital in shorthand with respect to bad debts. A large part of why I love the FT is its articles are short. That means I can process them quickly. But it comes at the cost of context.
- fnordpiglet 3y agoSubscription services are all about engagement and capture, both of which require clickbait to survive. This headline is absolutely designed to attract a click by harkening to financial collapse rather than crazy high capital requirements on mortgage books post financial crisis requiring mechanical recapitalization as interest rates and market stress take a toll.
- JumpCrisscross 3y ago> headline is absolutely designed to attract a click by harkening to financial collapse No, it's not. I read it this morning and passed it over. Then I saw it on HN and realised we'd have a clusterfuck. A technical analogy might be someone conflating an outage with the service going under.
- HumblyTossed 3y ago> Bankers say they are prepared. Their reserves against delinquencies were higher than needed a year ago, and are now being drawn down as delinquencies rise, they say. They argue that regulators appear to be focused on small and mid-sized banks’ exposure. Okay. But if this turns to shit, we best see some executive heads roll.
- JumpCrisscross 3y agoThe headline describes loss reserves, not total capital. When a bank makes a loan and it starts going sour, it impairs its balance sheet by noting a counterbalancing liability in the form of a loss reserve. The article alleges banks need to increase those loss reserves. It is not saying e.g. JPMorgan is exceeding its capital reserves.
- freddie_mercury 3y agoYeah the whole thing is a typical example of HackerNews readers not actually knowing anything outside of programming. All this means is bank profits MIGHT be slightly lower this year. All of them set records for profits in 2023, so this seems like a big nothingburger.
- bilbo0s 3y agoI wouldn't say "nothingburger", but I would say HN users, as per usual, are misunderstanding the issue. It's not as serious as exceeding cash reserves. It's, theoretically, a temporary problem that bank executives are actually legally obligated to remedy. It does, however, warrant banks reevaluating their risk assessment practices. Or maybe the problem is elsewhere? Something is definitely out of place for this situation to even arise so soon after the unpleasantness of 2008.
- JumpCrisscross 3y ago> not as serious as exceeding cash reserves Reserves are entirely an accounting item. There are no cash reserves. > warrant banks reevaluating their risk assessment practices It’s predicting they already have. This article is messaging likely earnings outcomes. Not a crisis.
- qarl 3y ago> Yeah the whole thing is a typical example of HackerNews readers not actually knowing anything outside of programming. I feel like this should be said a second time.
- 3y ago
- sarchertech 3y agoThis is a nonsense headline. What it actually states is that for all commercial property that is at least 30 days late on payments, they have $0.90 per dollar in reserves (specifically for bad commercial property loans). Not all commercial property that is 30 days late will end up in foreclosure, and the value to the bank of property in foreclosure isn’t anywhere close to $0. The current reserve ratio isn’t alarming when looking at historical trends. Even if it is too low, comparing the total value of delinquent debt to the total reserves in a headline is misleading at best.
- JumpCrisscross 3y ago> a nonsense headline It’s a concise one, assuming the reader has a working knowledge of our monetary system. A welcome assumption given the FT’s readership.
- francisofascii 3y agoNYCB lost more than 50% of its value last week, but have other banks? BAC, JPM, etc. didn't budge. If most banks are diversified with other types of loans, maybe you will never notice. Or maybe they haven't accepted the losses yet.
- bequanna 3y agoPer Fed Chairman Powell in a recent interview, the Fed believes that mid-size and smaller regional banks (not larger banks) have the most exposure from bad commercial property loans.
- fnordpiglet 3y agoJPMC in particular is literally too big to fail and that’s their entire business model. They’re so diversified and massive in everything that it’s impossible to fail. They’re the backstop of the backstop - see how the government resolved the small bank failure wave with JPMC taking on first republic and acting as a backstop against further bank chaos. This was a somewhat intentional ramp they’ve been on since 2008, become so massive that no amount of malfeasance or incompetence can disrupt their overall business.
- lifestyleguru 3y agoI have a very weird feeling that this Friday afternoon will bring some major news.
- 1vuio0pswjnm7 3y agoWhere archive.is is blocked: https://webcache.googleusercontent.com/search?q=cache:https://www.ft.com/content/4114454c-a924-4929-85f4-5360b2b871c6 https://webcache.googleusercontent.com/search?q=cache:https:...