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U.S. Economics: Macro Commentary & Insight

One Year After the Regional Banking Crisis – Some Sectors Still Recovering

March 8, 2024
  • Update on the failed banks and their assets
  • Agency CMBS Spreads
  • Current bank practices and proposed regulatory changes

One year following the regional banking crisis, U.S. regional lenders and the fixed-income market as a whole are still dealing with its repercussions. The unexpected collapses of three banks, Silicon Valley Bank, Signature Bank, and First Republic Bank caused ripple effects throughout the market. Agency Commercial mortgage-backed securities (CMBS) spreads, particularly Ginnie Mae (GNMA) spreads, are still recovering from the crisis to this day. Small banks, which hold the majority of commercial real estate lending market share, have tightened credit standards since the event but continue to be a source of liquidity.

The regional banking crisis began with Silicon Valley Bank, which collapsed on March 10, 2023, following a run on deposits. Months of government stimulus and near-zero interest rates resulted in an influx of cash to bank balance sheets, which they put to work by writing loans and purchasing securities. When the Fed pivoted its monetary policy in order to fight record-high inflation, bank balance sheets were suddenly holding below-market interest-bearing securities. When forced to sell a portion of these securities, losses on the collateral were realized. The SVB collapse was caused by improper hedging of interest-rate risk on the bank’s portfolio. SVB is an extreme example of improper duration management, but this should not downplay the pressure that low-coupon seasoned securities continue to put on the banking sector as a whole, especially as the higher-for-longer narrative is back in vogue.

Following the collapse of the three banks, their assets were repossessed by the Federal Deposit Insurance Corporation (FDIC). The $114 billion of assets underwent a smooth liquidation process of the portfolio for all products but the $13 billion of GNMA securities. The struggles the FDIC faces in the sale of the GNMA securities stem from loans originated during the COVID-19 pandemic, which yield significantly less than current originations. GNMA project loan spreads increased by 75 bps from March 13 to May 22 over the course of the crisis. The FDIC has discussed alternatives to slashing the prices on the bonds, including potentially repackaging the debt into new securities, but the underlying pool will remain the same, so making some securities safer for money managers could result in the remainder being even riskier. Adding to the struggles, new origination curtailed significantly in 2023. “You risk overwhelming the market,” said Mary Beth Fisher, a fixed-income strategist at Santander. “The overall size is nearly as large as the average yearly issuance for these types of securities.”

Market Share of Bank CRE Lending

Source: FRED, Board of Governors of the Federal Reserve System (U.S.)

Bank Term Lending Program Balance

Source: Federal Reserve
As of this week, the FDIC again reconsidered their strategy regarding the portfolio of GNMA securities. The FDIC moved the Ginnie Mae project loans (GNPL) portfolio to a subsidiary of the U.S. Treasury Federal Financing Bank (FFB), further weakening the possibility of the portfolio being sold to the market. This announcement was a positive note for spreads, which have rallied significantly in 2024 and are nearing pre-crisis levels.

The assets held by the three failed banks have caused headaches in other sectors besides Agency CMBS. Non-Agency CRE loans originated by the failed banks, which were purchased by New York Community Bank following the regional banking crisis, have caused NYCB to incur significant write-downs on their values. Bloomberg recently reported that the debt of banks that have significant commercial real estate exposure is trading at a discount compared to the banks that do not. Fed Chair Jerome Powell has recently discussed the possibility of increasing banks’ reserve requirements, and while no new regulations have been proposed, such a shift could substantially alter the existing bank lending market.

Additionally, the Bank Term Funding Program (BTFP), which was created to provide additional funding to eligible depository institutions to help assure banks can meet the needs of all their depositors, will cease making new loans on March 11, 2024. This program was heavily utilized at the start of the regional bank crisis, leveled off for nine months, and had an uptick towards the end of 2024. The repercussions of this program ending will surely play out in upcoming months.

This commentary and any statements, information, data and content contained therein, and any materials, information, images, links, sounds, graphics or video provided in conjunction with this document (collectively “Materials”) has been prepared for informational purposes or general guidance on matters of interest only, and does not constitute professional advice, advertising or a solicitation. The Materials are of a general nature and not intended to address the circumstances of any particular individual or entity. You should not act upon the information contained in the Materials without obtaining specific professional advice. As such, nothing herein constitutes legal, financial, business, investment or tax advice and you should consult your own legal, financial, tax, investment or other professional advisor(s) before engaging in any activity in connection herewith. The information in the Materials is not a substitute for a thorough due diligence investigation. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in the Materials, and, to the extent permitted by law, Berkadia Commercial Mortgage LLC ( together with its affiliates, the “Company”) neither accept nor assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the Materials or for any decision based on them. No part of the Materials is to be copied, reproduced, distributed or disseminated in any way without the prior written consent of the Company.

Questions? Contact Us.

Josh Bodin

Senior Vice President
Securities Trading
josh.bodin@berkadia.com

Steve Bevilacqua

Assistant Vice President
Securities Trading
steve.bevilacqua@berkadia.com

TIGHTER CREDIT STANDARDS AND BANK LIQUIDITY

Commercial real estate lending by banks represents one of the largest blocks of available debt financing in the U.S. market. In the wake of the regional banking crisis, where three of the four largest American bank failures happened in the span of a couple months and the Federal Deposit Insurance Corporation was forced to take over, the attention of the market and regulators shifted to analyzing CRE lending and any complicity this sector had in the collapse of regional banks.

NET PERCENTAGE OF DOMESTIC RESPONDENTS TIGHTENING STANDARDS FOR COMMERCIAL REAL ESTATE LOANS

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