It is nearing the first anniversary of the demise of Silicon Valley Bank and others, and the launch of a federal bank programme, which expires this month. As bank exposures to commercial real estate prompt awkward questions, we speak to a Swiss wealth manager about its views and positions.
“Beware the Ides of March,” the soothsayer tells Julius Caesar in
the eponymous Shakespeare play. And, as this month gets under
way, it brings up the first anniversary of the collapse of
Silicon
Valley Bank and Signature Bank in the US, and the endgame of
Credit Suisse in Switzerland.
So how worried should investors be about banking problems a year
on, and what can they do?
Entering into the theatre of worry, so to speak, is commercial
property. The offices market, for example, is suffering from a
large shift from office working, accelerated massively by the
pandemic, and the rise in interest rates after 12 years of being
on the floor.
There’s trouble brewing. Filings to the US Federal Deposit
Insurance Corporation show that real estate loans have now
overtaken loss reserves at a number of large US banks,
highlighting the potential that markets could see another
“SVB-style” event, or even a new subprime crisis, according to
Switzerland’s Banque Eric
Sturdza.
The possibility of an unforeseen, improbable “black swan” event
such as a new bank failure/property crash has turned into a
“grey” one, Eric Vanraes, head of fixed income asset management
at the bank, told this news service.
“One year ago, just after the collapse of SVB and other regional
banks, the Fed set up a Bank Term Funding Program to support some
other banks if necessary. This BTFP program is supposed to
end in March 2024 after one year of existence,” he said. “We hear
a lot of comments around the odds of a Fed’s rate cut but I think
that it is more important to follow closely Jerome Powell’s
comments on the topic of BTFP.
“If it ends, as planned, it means that the Fed believes that NYCB
and CRE loans are not a huge concern which could lead to a
systemic risk in the banking sector.
“But if he [Powell] mentions that this program will be extended
after March, this is proof that the crisis is deeper and has
become a major concern. In this case, the black swan which turned
already grey, will be white,” Vanraes said.
A rise in US official interest rates from zero to 5.5 per cent in
the space of 18 months has hit a sector accustomed to cheap
money.
“Sooner or later, you are going to have an accident,” Vanraes
said.
Reflecting on the exposures of banks, Vanraes said the issue is
mainly a US one, although a Japanese bank with commercial real
estate loans may have problems, as might those in Germany.
A study at from the Columbia Business School at the end of 202
showed that 14 per cent of commercial real estate loans in the US
were in negative equity at the end of the year.
What is to be done?
Vanraes, in his asset allocation to fixed income, had been
holding high-duration paper, with some short-term paper too in a
“barbell” approach with no exposures in between. “We recently
decreased this strategy and started to buy five-year [US] notes,”
he said.
If or when interest rates are cut, this will make the two-year
sector more expensive, and quickly, so it makes more sense in
valuation terms to buy the five-year sector as a more effective
way to play the shift in bond yields that is likely to come,
Vanraes said.
“We are gradually increasing our exposure to the five-year area.
We also buy five-year TIPs [index-linked US Treasuries],” he
said, explaining that if US inflation is at, say, 2 per cent,
then the yield gives more than 4 per cent – an attractive outcome
for the level of risk.
New York drama
Late last week, commercial real estate lender New York Community
Bancorp, which said it had discovered “material weaknesses” in
the way it tracks loan risks, wrote down the value of companies
acquired years ago and replaced its leadership. The stock
plunged. The company expects to miss a deadline for filing an
annual report as it shores up controls, reports said. The
bank – a prominent lender to New York apartment
landlords – acquired Signature Bank last year, which had
collapsed in the same month as SVB.
The US Federal Reserve may not just try to ease conditions by
cutting rates this year, Vanraes said. It could expand its
balance sheet through asset purchases – quantitative easing.
“There could be a liquidity crisis and the Fed may need to put
liquidity back into the system. Last year in March, the Fed did a
tremendous job and the cost was only $400 billion [to its balance
sheet].”
If the problems seen from the likes of NYCB are idiosyncratic
rather than systemic, handling this may cost the Fed’s balance
sheet about $500 billion.
“Quantitative easing as a tool is not dead. It has become an
conventional weapon,” he said.
Investors should remember that it took the wider financial system
a decade to recover from the failure to stop the collapse of
Lehman Brothers in September 2008, he said.
Central to understanding the problems of commercial property, he
said, is that part of it is caused by the rise in rates, and
another element comes from the shift to working from home since
Covid-19.
Data suggests that worries about office occupancy rates
might be overblown. The return-to-office trend gained steam in
December 2023 when average visitation rates at 350 Manhattan
buildings rose to 67 per cent of 2019 rates, according to the
Real Estate Board of New York. This is a rise from 65 per cent in
November.