Indirect lending—along with foreclosed properties, trading portfolios and other assets linked to commercial properties—brings banks’ total exposure to commercial real estate to $3.6 trillion, according to a Wall Street Journal analysis. That’s equivalent to about 20% of their deposits. Holdings of CMBS and loans to mortgage REITs and other nonbank lenders accounted for about 18% of the nearly $3.6 trillion in commercial real-estate exposure in 2022, or nearly $623 billion. The first quarter of 2023 marked the first decline in banks’ commercial real-estate holdings since 2013. At that point, banks’ overall securities holdings had lost nearly $400 billion in value, largely due to higher interest rates. Banks don’t have to mark down the value of loans in most cases, so the real losses are likely greater. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses.
- Date Posted:
- September 6, 2023
Unexpected changes in monetary policy can slow the pace of economic activity much more persistently than is commonly believed. In response to a 1% increase in interest rates, output would be about 5% lower after 12 years than it would otherwise be. To provide some context for these numbers, consider some data for the United States. In response to a similar 1% increase in interest rates, after 12 years TFP would be about 3% lower and capital would be about 4% lower. When we separate our interest rate experiments into those that resulted in rate hikes versus those that resulted in lower interest rates, we see that there is no free lunch. The blue line shows that lower interest rates have mostly temporary effects that vanish after a few years, as traditional theories predict.