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U.S. real estate and banking: Crisis and resilience


U.S. real estate and banking, news,financial news

In the United States, the commercial real estate market is experiencing significant stress. This is primarily due to escalating problems among regional banks, which play a crucial role in financing real estate ventures. As these banks encounter difficulties, the ripple effect is felt throughout the real estate sector, raising concerns about a potential wider crisis. However, there's a belief that proactive measures and interventions might prevent this situation from escalating into a full-blown crisis.


Jamie Dimon, the CEO of the financial giant JP Morgan Chase, has offered his insights on the situation. He acknowledges the challenges in the real estate market but remains optimistic that these issues will not spread to the broader U.S. economy.


His optimism hinges on the absence of a general recession in the United States. Dimon's comments are significant, given his extensive experience and respected position in the financial industry.



Dimon pointed out that the current lower property valuations, which are linked to the rising interest rates, shouldn't be immediately classified as a crisis. According to him, this is a familiar scenario in the financial world.


However, he cautioned that if interest rates continue to rise and the U.S. enters into a recession, then the real estate market could face severe challenges. This situation could also exacerbate problems for some banks, particularly those heavily invested in real estate.


The concerns about the commercial real estate market were further heightened when New York Community Bancorp, a significant player in the sector, announced a reduction in its dividend. This decision led to a sharp 15% drop in its stock value in just one trading session.


The market reacted strongly, fueled by fears of potential deposit outflows. Additionally, NYCB's fourth-quarter results for 2023 showed a substantial increase in its reserve for credit losses, amounting to USD 552 million, far exceeding the expected USD 45 million. This development is a clear indicator of the increasing financial strain within the sector.



Despite these concerns, Jamie Dimon perceives the higher default rates as a part of a "normalization process." He suggests that the market is adjusting after a prolonged period of unusually low default rates.


According to him, this adjustment is a natural market reaction to the changing economic conditions, including the rise in interest rates and shifts in the real estate market.


Jerome Powell, the Chairman of the Federal Reserve, has also acknowledged the seriousness of the situation in the commercial real estate sector. He recognizes that this sector poses a real problem, which could potentially lead to the closure of several regional banks.


This is especially concerning given the backdrop of last year's banking crisis. Powell's statement underscores the precarious state of the banking sector, particularly in relation to commercial real estate investments.



Adding to the sector's challenges is the upcoming conclusion of the Bank Term Funding Program (BTFP) in March. This program was a critical part of the support mechanism for the American banking system, established in response to the collapse of major banks like Signature, Silvergate, and Silicon Valley Banks.


These collapses were largely due to massive deposit withdrawals, which subsequently wreaked havoc on the profitability of banks in the high-interest-rate environment and devalued their government bond holdings. The end of BTFP raises questions about the future stability of these banks.


Ru Xie, an analyst at The Conversation, believes that the closure of BTFP will not necessarily lead to additional bank failures. She argues that banks have had an extra year to adapt to the higher interest rates.



Furthermore, banks still have the option to borrow from the Federal Reserve through another mechanism, the discount window. This viewpoint suggests a resilience within the banking sector that might withstand the end of BTFP.


However, navigating the U.S. economy through potential recessionary conditions while dealing with the troubled regional banking sector will be challenging. Despite these difficulties, analysts caution against prematurely dismissing the sector's potential for recovery in the coming years.


27.02.2024



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