Study shows fear scenario from office real estate: New US banking earthquake could also hit Switzerland

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The spring of 2023 showed how serious a banking earthquake in the United States could be for the global economy and Switzerland. After several US regional banks faced major difficulties, the stock market speculated about a possible decline of Credit Suisse. The former major Swiss bank had to be rescued by UBS in an emergency takeover. But now new problems appear on the other side of the lake.

A new study by the National Bureau of Economic Research outlines a real horror scenario if the US Federal Reserve doesn’t lower interest rates soon. “As long as interest rates remain high, the US banking system will face a significant risk of bankruptcy,” CH Media said, citing the research.

Powder keg office real estate

This time the danger comes from the office real estate market, which is experiencing a huge boom. At the beginning of 2022, the value of office buildings was almost three times higher than it was two decades ago. Then, within six months, key interest rates rose by five points, heralding the end of tangible gold. Investors shifted their money to other investments.

The corona epidemic has perfected the poison cocktail. Since then, many office workers have been working from home. Vacancies in the office real estate market have skyrocketed and still hover around 20 to 30 percent in some U.S. cities. Prices and floor space of office buildings have fallen.

Over half a billion loans affected

Things could become particularly unstable for the real estate industry in 2024. Many companies are forced to renew their expired loans at interest rates more than double. A volume of 544 billion dollars. But banks will have to refuse in many cases, according to the study’s authors. In 45 percent of real estate, loans exceed the value of the property.

For the other 25 percent of loans, things look even bleaker. Interest costs here are currently higher than income from office properties. The industry is struggling to survive in 2024. So this also represents a real danger to the US banking industry: Since the rise in interest rates, banks are now facing huge bond losses of theoretically $2,000 billion. This was the trigger for the banking earthquake in the US in the spring of 2023.

Banks can be swept

As a result of the office real estate crisis, 10 to 20 percent of banks’ loans may default. The authors of the study assume that possible losses will be between $80 and $160 billion. Banks may have to sell some of their bonds at lower prices. Then the losses in these suddenly become real. In the event of a sale, half of US banks, approximately 2,400 banks, are at risk of bankruptcy.

A horror scenario that threatens bank customers with a bank run, as in the spring of 2023. At the time, many US regional banks went bankrupt or had to be bailed out. Customers were once again able to get their bank deposits to a safe place, further exacerbating the banks’ problems. Due to the great importance of US banks to the global economy, this is also likely to have consequences for the banking centers of Europe and Switzerland. Local banks make loans to U.S. institutions that will not be repaid in the event of bankruptcy; This could lead to huge losses for European and Swiss banks.

Central banks need this. If they lower key interest rates in time, they could eliminate the delicate situation. In the event of a possible bank run, they would need to take quick action again to restore customer trust.

Source :Blick