Finally saying it out loud:
Extend-And-Pretend’ Strategy On CRE Loans Poses Systemic Risk, N.Y. Fed Says
Regional banks are delaying disclosing the distress in their commercial real estate loan portfolios, creating greater fragility in the overall financial system, the
Federal Reserve Bank of New York warned in a
research paper published this week.
It's a paywall, if you're not registered I posted more quotes.
https://www.bisnow.com/national/new...tions-due-to-extend-and-pretend-habits-126472
“The expansion of the maturity wall represents a financial stability risk as a sizable, and increasing, portion of bank regulatory capital is at risk should these CRE loans default,” authors Matteo Crosignani and Saketh Prazad wrote. “The possibility of a large and sudden capital hit for banks becomes more likely as the maturity wall becomes taller.”
"Crosignani and Prazad wrote that extend-and-pretend has caused a 4.8% to 5.3% drop in CRE mortgage origination since the first quarter of 2022. Meanwhile, as of the fourth quarter of 2023, the maturity wall represents 27% of bank capital, up 11 percentage points from 2020, according to the report."
"The practice of not recognizing distress on their books may provide short-term relief from regulators and investors, but a large number of defaults occurring at the same time would result in a huge capital hit for banks. Solvency concerns could cause a bank run by depositors, along with a flood of property
foreclosures and fire sales, the authors wrote."
"Smaller banks are more likely to put off recognizing distress, the researchers found."
"New York Community Bancorp teetered on the
edge of collapse earlier this year when its leaders, after previously boasting of the bank's “stellar” commercial real estate loan book, recognized huge losses in January and slashed its dividend.
The revelation led the bank's stock price to plummet, and it took
a $1B infusion of capital and a leadership shake-up led by former Treasury Secretary Steven Mnuchin to stabilize.
The new leadership forced the bank to undergo a review of its loan book and found
the pain was greater than previously disclosed. Its net charge-offs hit $349M in the second quarter, up from $81M, while nonaccrual loans reached almost $2B, more than the $700M in the first quarter.
The delay in recognizing weakness in the CRE portfolio
triggered a class-action lawsuit against NYCB led by two of its pension fund investors.
Before NYCB’s near collapse, five other
regional banks were
downgraded by S&P Global from “stable” to a “negative” outlook due to their CRE exposure.
The report further highlighted that the extend-and-pretend habit is a more recent phenomenon, largely due to the rise in
interest rates following historic lows, which has prevented refinancing."
"But the new circumstances also delay what could be an end for a large number of futile office buildings, preventing reinvestment that could help turn around business districts' fortunes sooner.
“The resulting crowding-out of new credit provision slows down the efficient reallocation of CRE credit, likely hindering the downsizing of office districts in urban areas, also affecting cities’ tax revenues,” the authors said."
nypost.com
