There are new warning lights flashing on the economic dashboard, and they're coming from the banking sector. Last week, New York Community Bank saw its credit rating and stock price plunge after reporting dismal results, tied to the slumping commercial real estate market. That has led to new concerns over the possible failure of this bank, and whether it could trigger more banking collapses.
The combination of high interest rates and growing office vacancies due to the growth of remote work following the pandemic has created a perfect storm for commercial real estate, which is now coming to a head. "With a lot of these balloon payments on older loans now getting refinanced at higher interest rates, and with fewer tenants paying rent, it is becoming harder for those who borrowed this money to pay it back," says Hank Lewis, economist at Lone Star College.
That stress on the commercial real estate market falls directly on small and midsized banks like New York Community, which hold the vast majority of these loans. "You have these smaller and regional banks that have a large amount of commercial real estate loans, and now you start to see those go belly up," says Lewis. "Now, they're either going to have to right some of those off and take a loss, or see if they can sell them to somebody for pennies on the dollar to make up some of the loss."
"Either way, it is putting these banks in jeopardy of being able to make their obligations and handle their other customers," he continues.
Last year, when Silicon Valley Bank failed, the Federal Reserve stepped in and provided emergency loans to banks in order to stave off a mass collapse. Lewis tells KTRH the federal government may have to get involved again. "At some point, the Federal Reserve and the FDIC are going to have to take a look at this, and if it seems like (New York Community Bank) cannot recover, they may have to write them off too...and that's the biggest concern," he says.
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