Is Switzerland also at risk?: The real estate crisis in the USA also affects European banks

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Was last year’s bank earthquake just a harbinger? In 2023, Silicon Valley Bank and Signature Bank collapsed in the USA. First Republic Bank and Swiss Credit Suisse had to be rescued through cloak-and-dagger operations.

According to some experts, new shocks could push many more financial institutions into the abyss. As in the subprime crisis of 2007, the danger comes from the USA again. At the time, junk loans in the US housing market triggered a global economic crisis. According to the news of “Switzerland am Weekend”, this time the danger comes from the US office property market.

Share price dropped almost 50 percent

The situation of some banks has already alarmed the authorities: Deutsche Pfandbriefbank has made extensive loans for office properties in the USA. The bank even slipped into the red in the fourth quarter of 2023. For weeks, more and more investors have been betting on financial institution share prices to fall. The price has dropped by almost 50 percent.

German financial regulator Bafin is monitoring the situation closely. “Bafin is monitoring current market developments and taking them into account as part of its ongoing supervision,” a Bafin spokesperson told “Handelsblatt” earlier in the week.

Bafin: Individuals may be in a difficult situation

Other German financial institutions also made extensive loans: Deutsche Bank made loans worth 17 billion euros for commercial properties in the United States; of which 41 percent were office properties. Bloomberg’s figures show that additional loans worth over 180 billion euros are on record at LBBW, NordLB, BayernLB and Helaba.

According to Benjamin Heinrich, there is no need to panic. “Commercial real estate is a risk factor for some German banks; but mainly in terms of profitability and less capital. “Therefore, they do not identify a systemic risk,” the manager of S&P Global Ratings tells “Handelsblatt”.

The situation is considered to be more risky in Bafin. “Highly specialized business models or poor property selection by banks can leave even individual institutions in a difficult situation,” the report said. German financial institutions also have to take into account greater losses on the domestic market for office properties. Their values ​​fell 12.1 percent last year.

The perfect poison cocktail

In the USA, the problem is even more serious: at the beginning of 2022, office buildings were valued at almost three times more than they were 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.

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. According to a study by the National Bureau of Economic Research, the volume is worth $544 billion. But in many cases banks will have to refuse. In 45 percent of real estate, loans exceed the value of the property.

2,400 US banks may face problems

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.

This danger already affects many banks that do a lot of business in US office real estate: The share price of US bank NYCB has fallen. According to the “Weekend Switzerland” news, Japanese bank Aozora had to declare a loss for the first time in 15 years. Many banks in Scandinavia are also involved in commercial real estate in the United States.

Central banks are needed

There is currently no statement from Swiss financial institutions on this matter. However, if financial institutions around the world are in a difficult situation, the earthquake will be felt as much as Switzerland. Local banks and institutions in the United States and elsewhere provide each other with liquidity that cannot 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