Hundreds of Banks Are About To Collapse Over-Leveraged In Commercial Real Estate… Cant Pay Debt
Summary
➡ Many banks are struggling due to bad decisions and over-lending, especially in commercial real estate. This is causing some banks to become insolvent, or unable to pay their debts. The problem is particularly severe in distressed cities and states. This issue is affecting both large and small banks, with smaller banks’ failures impacting local communities and economies.
➡ If the FDIC fails, each depositor will still receive up to $250,000. The US has the biggest commercial property market, and banks provide most of the loans for these properties. There are four main types of loans: consumer, company, residential mortgage, and commercial real estate loans. Smaller banks often have more commercial real estate loans because they can’t compete with larger banks in other areas. If the Federal Reserve raises rates, it could lead to more expensive loan payments and potential defaults. The interconnectedness of the economy means that changes in one area, like people working from home, can have wide-ranging effects on other areas, like commercial real estate and local businesses.
Transcript
And let’s get into it. Hundreds of small and regional banks across the US are feeling stressed. More than 280 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates. There’s no doubt in my mind there’s going to be more bank failures, or at least dip below their minimum capital requirement. There will be bank failures, but this is not the big banks. Rapid interest rate hikes can mean borrowers suddenly face more expensive loan payments. And if they can’t afford to pay up, they may default on their loans. A record 929 billion.
Let me also say, shout out to everybody I see all in a chat, loving on my guy, Jamal. Shout out to everybody that directly sent him something. So I put his cash app, and again, only what you can. Don’t, don’t jump out the window or anything like that. Only what you can. But make sure that y’all show your brother some love also, and hold them up and hold them down. So shout out to Jamal, y’all see it. If y’all want to see what his cash app is, just rewind the show. But shout out to him, man.
Shout out to you for continuing to run it up and take care of business. We love you, bro. We love you in real life. All right, let’s continue on with the show. Dollars worth of loans are coming due, aka maturing in 2024, driven by mass extensions of loans originally due in 2023. Regulators are working behind the scenes with potentially at risk lenders. They’re issuing sort of confidential, under the radar report, saying, you gotta raise your capital. We’ll see a lot fewer bank failures than we would otherwise if we’re successful in attracting private capital to recapitalize these banks.
These are banks that probably need to raise capital, or they could try to get acquired by a stronger bank. However, banking sector acquisitions have dwindled. These stress banks could have big implications for the US economy. In one year since the collapse of Silicon Valley bank of course we’re seeing cracks form once again. A year later. Both major and regional bank indexes are still struggling since 2020. Three’s bank failures. I think most of them are just fine. But confidence is everything in banking. People start losing confidence and even the healthy banks can be adversely impacted. Here’s why.
Hundreds of small banks may be at risk of failure and how insolvency can be avoided. The US has thousands of banks. There are about 4600 banks in the United States. But in most developed economies in the world, there aren’t regional and community banks. Approximately 4000 banks in the US are small banks, also known as community banks. If you add up the collective assets of those 4000 banks, small banks control roughly the same value of assets as America’s largest bank. My girl sis sis says, ad, is this tied to high credit card debt? No, I don’t think so.
In particular, I think that that’s one of the contributing factors. But right now it looks like the biggest thing that’s impacting these is commercial real estate. Right? Because you got to remember, listen, the most is two hugely distressed aspects of what banking is looking like today. The first one is commercial real estate. If you really want to understand the health of a community, or you want to understand what’s going on when it comes to the economy or a possible recession or anything like that, the first thing that you want to look at is real estate. Personal real estate and commercial real estate.
Now, the personal real estate aspect of it is fine because housing is still going up, interest rates are still trying to tamp down on inflation, buyers are still looking for properties. It’s artificially kind of being propped up because interest rates are so high, is keeping prices relatively in check because most people can’t afford new mortgages. Considering that the rate that which you make money is not keeping up with the rate of inflation. So with higher interest rates, you know, it’s still people that’s in the market looking for homes, maybe not spend as much money, but the difference is that there’s not enough sellers, because sellers know that once they sell their home and they get that windfall, they still got to find a place to live.
And so most of them don’t have enough equity in a home to take the difference of what the purchase price is. And then whatever the fees are and whatever it is that they sell off in order to go back to the bank to go out and purchase their own, a new property outright cheaper or living somewhere else, you know, that would allow for them to be able to lower their costs. So why would I sell my home? Let’s say I own a home and it’s appreciated to $500,000. I paid $300,000 for it, right? That was the original purchase price.
After fees and costs, let’s just say you exit with about anywhere between 150 and 180. I still got to go out and mortgage another property. Why wouldn’t I just keep the property that I have at a low interest rate, probably somewhere around three to 4%. Why wouldn’t I keep that property that I already have at about 3%, three and a half percent. Instead of going out and financing a new property and trying to take the equity out, if I want to take the equity out, I could just go and get a HELOC, I could refinance, but then I wouldn’t refinance, because then I would be refinancing, refinancing at another rate, right? So homeowners that would normally be selling.
A shout out to mister Brian Francis. I’m gonna be reading that super chat shortly. Homeowners that would normally be selling is staying put. They saying, ah, imma just chill, because it doesn’t make sense financially for me to step outside of that. Now. Conversely, commercial real estate is the one that’s suffering, because what’s happening with commercial real estate is they’re trying to find new uses for these buildings. Like we did a show last week on St. Louis, right? And it’s a lot of commercial real estate where they still have to pay whatever it is that they owe to the bank.
But a lot of these commercial real estate properties are defaulting because they have no tenants. When the pandemic hit and everybody went and they work from home, a lot of these companies are starting to abandon some of these same places in these large buildings. And if they can’t repurpose it or find new tenants, guess what happens? The same thing that happens when it comes to personal or residential real estate, except it’s on a much larger scale. So now you see buildings that was originally being slated to be sold for 100 million, or they built it for all this money, they selling it for pennies on a dollar, and people are taking advantage of it, but at somebody else’s expense, usually the bank.
And so the bank, what they do is they write that down. They write that down as a loss. But some banks are able to absorb losses differently than others, because either they have other parts of their business as being able to prop it up, or. Or on the other side, they have enough good loans to subsidize for the bad loans that they know that they don’t have to write off or they’ve allocated enough money to be able to write off all of the distressed property that they about to run into. It’s the same thing when it comes to repossessions.
The reason why it’s so difficult and why they look at your credit in order to loan you money in order to get a. And get a car, and they raise up rates higher when you’re a subprime lender. A subprime lender or subprime lending. Shout out to Miami Dade county of the courts. I’m a definitely, definitely read that super chat shortly. Some prime lending is basically looking at somebody, somebody looking at their credit profile, looking at how money, how much money they make, and they have a greater chance of defaulting on the loan because you know that they got a bad history of paying and or they don’t have a long job history and or their credit to debt ratio was saying something, whatever, right? So they jack the interest rates up to make more money on the front end because they know it’s a stronger possibility for you to not pay your car note.
Then they got to come get the car, sell a car at auction, sell it at a loss, and then write that down on a balance sheet. Now take all of that information and then translate it over to commercial real estate, because there’s a lot of commercial properties and a lot of financing that went along with a lot of these large companies, and they can’t find tenants or they can’t resell a property off. And in most instances, it’s in cities or states that are already distressed. The San Francisco, the St. Louis, the Chicago’s, all of these places.
And guess what? These banks are the ones that absorb all the. All of the problems and all of the trouble that come along with lending out your money in order to make more money that people are now defaulting off of. So what happens? The bank collapses or they have to merge because they don’t have enough on a balance sheet to continue to maintain profitability. And so as a result, the bank becomes insolvent. And so the only other thing that goes along with that is the credit card debt. Right. And stuff like that. Right. So I’m not gonna get into the credit card debt because we gonna get into all of that later.
And that’s gonna be a whole nother show. But my point is, is these banks are failing because they don’t make good decisions when they are, when they are doing really, really well. They over leverage themselves. They get too greedy. They start lending out money and they not really paying attention to the long term repercussions of what could happen. And their calculated risks are not as good as they say that they are. And banks fail all the time. When you see people come into these spaces and they say, how come we don’t have any black banks? What do you mean? Banks fail all the time.
They fail all the time. It’s banks that fail and go and solve it every single year. Every single year, 100%. But right now you experiencing a collapse of commercial real estate because it’s a lot of, they trying to repurpose the building, they trying to find new buyers, they’re trying to finance, they’re trying to work with the bank. But often at times, these, these commercial real estate properties, in a lot of instances, are driving a lot of these banks into insolvency. And so that’s basically what you see happening. Says, hopefully I explain that clearly enough for us to be able to get it because, you know, I’m a c student, so.
AP Morgan Chase, with $3.2 trillion of assets. Now the distress. Now Chase is the largest bank in the United States of America. Literally too big to fail. That’s why we listen to Jamie Dimon, because Jamie Dimon is the CEO of Chase and he basically controls or he has a great relationship in order to impact what’s going on in the banking sector and the industry. Right. Bank category. And those are between one and 10 billion in assets. The great bulk of the institutions that are going to be, you know, facing the stress. The Klaros group analyzed 4000 banks screening regulatory call report filings for banks with over 300% of capital in commercial real estate loans and potential losses tied to interest rates.
So I’m Brian Graham. I’m a founder and partner in the Kleros group. We thought it was important to focus on how they measured up on those two macroeconomic factors that are at work. 282 us banks are at risk with nearly $900 billion in total assets. The majority of those banks are smaller lenders with less than $10 billion in assets each. 16 of those banks are larger, with anywhere from ten to $100 billion in assets. Now, assets obviously are different, and different banks specialize in different things. If you look at fidelity, fidelity and, you know, some privately owned places like Charles Schwab, Charles Schwab is, I believe, privately owned.
They specialize in retirement. They specialize in making sure that they manage your retirement. Another bank that does it, that I used to work at is Comerica bank. Comerica bank specializes in making sure that they manage large assets or your retirement or put you in a good position in order to, like. You see what I’m saying? So they market themselves differently. Other banks more or less specialize in mortgages, right? Or a lot of people special age specialize in originating mortgages. Some banks specialize in credit cards. And, you know, they project themselves as a credit card lender, but in reality they just a bank, right? So when you see their name on something or you see them or other banks specialize in processing.
So there’s different banks that do different things and they generate revenue different ways. Credit unions obviously generate money in a whole nother way. So, you know, when you look at the amount of assets that they have, the asset classes differ from bank to bank depending on what it is that they do. But then when you see these banks that are involved in these large commercial deals, and that’s why it’s so much easier for a person with resources. Let’s say somebody like Elon Musk, right? And he says, listen, I guarantee or I put up against what it is that I own in assets in order to be able to secure these loans because I want other participants.
I don’t want to fund it 100% myself. I want to secure these loans in order to buy X or what was formerly known as Twitter. They’re willing to do that because they can secure it against your assets. You see what I’m saying? They know that you’re solvent. But when the asset become the very thing that’s devalued now, which is some of this commercial real estate property, it then makes the bank insolvent because they can’t unload that. They not making money from that on the interest payments that come along with you financing that property. There’s only one bank with over $100 billion in assets.
One point of this analysis is to say, look across the universe of 4000 banks, where are the issues going to be? They are going to be in the middle to small sized banks, which is by its nature less systemic. I think the issue is that a lot of these smaller banks support communities away from the coast. You’re essentially hamstring the economic development in those communities. When somebody said banks make money off of running all of us broke, eh? No, they prefer to keep you paying. That’s how they make their money. They make money off of you paying your interest every single day.
Well, even if they’re smaller banks, the communities that rely on them certainly care about them. The US has about 130 banks that are considered regional banks and collectively they control just under $3.1 trillion in assets. The larger regional banks, they’re a really important source of credit for smaller and medium sized businesses, local governments, nonprofits. Without regional lenders, more businesses may have to turn to big banks for services that may be more expensive and less personable, and they may not like their options. They provide competition for the really large, you know, mega banks, the multi trillion dollar banks, which is good for individuals.
The consequences of small bank failures are more indirect. I think we have a very stressed banking system, but the vast majority of those banks aren’t insolvent or even close to insolvent. They’re just stressed. Doesn’t mean that communities and customers don’t get hurt by that stress. Natural reactions to not invest in the next branch or technological innovation or to make the next hire. It just hurts a community in a different way, and it hurts it more kind of subtly and gradually and over time than a bank failure directly. You know what else hurts a community? When you see all of this scamming and you see all of these people that’s coming up and they saying, hey, man, this is how you get a bigger credit line.
This is how you do this. This is how you can get a Navy federal credit card. When you see people ultimately default on a thing that they finesse, and then you see all these stupid TikToks in these videos of people telling you and trying to teach you how to get bigger credit lines or all of this stuff, but what you gonna do with it? I seen a guy on a video that came across my profile, and he said something like, man, I’m able to get people bigger credit lines with Chase. You know, normally on a regular credit line with Chase, it would be 18, $20,000.
I’m able to get people $100,000 in credit cards to do what? What are you doing there? For what do you need $100,000 in credit with these high interest credit card debt? So much finessing. And ultimately, ultimately, this is the thing that drives a lot of banks out of business, too. Seriously, because I’m telling you, listen, it ain’t going to be this when you got to pay 26% interest on $80,000. Life is going to be life in on you. Life is going to life on you. And that’s what drive a lot of these banks out of business, too, because then they got to write down that debt.
It’s no consequence if they’re below the insured deposit limits, which are quite high now, 250,000. That means if a bank insured by the Federal Deposit Insurance Corporation, also known as the FDIC, goes under, all depositors will be paid up to at least $250,000 per individual, per bank, per ownership category. FDIC has really got a strong record on this, so people should not worry. The US has the largest commercial property market globally, and banks underwrite the majority of commercial real estate loans. If you think about the. I’m gonna read those super chats shortly. Thank y’all. I appreciate y’all.
Overall, there are four basic types of loans. Consumer loans, C and I loans, which are essentially loans to companies, residential mortgage loans, and commercial real estate loans. Regional and smaller banks have always tended to have higher concentrations of commercial real estate. Is less that they just made a bad decision and jumped into commercial real estate with both feet. And it’s more that they just don’t have the scale to compete with the larger banks in the country and in consumer lending, or in residential mortgage, or in commercial and industrial lending. And that leaves them with a higher concentration and exposure to commercial real estate.
The markets in general are poking the banks on their exposures. You know, how are they being managed? What are some of the stresses that they’re thinking about? And probably most importantly, how are they reserving for those potentials? When the Federal Reserve raises rates, commercial real estate loan payments become more expensive for borrowers. If borrowers can’t afford payments, they may default on their loans. Federal Reserve Chairman Joe Jerome Powell has candidly said, look, there are going to be bank failures. It’s going to happen. We have identified the banks that have high commercial real estate concentrations, and we are in dialogue with them around, you know, do you have your arms around this problem? Do you have enough capital? Are you being truthful with yourself and with your owners? Do y’all realize that before we get into unrealized gains, do you all realize that they already knew that this was going to happen before the pandemic hit? Think this through.
If you didn’t think that the Federal Reserve and our federal government and all of these people, and they already told you, and I had been telling you when this had happened in the first place, I said, listen, y’all, it’s gonna be a lot of gnashing of teeth. And as they raise these rates, they already telling you that it’s gonna be some suffering and it’s gonna be some defaulting, and people are gonna go broke. And the rate of inflation and all of this stuff, it’s the only way. When I seen inflation hit eight, 9%, I was like, it’s over.
They got, it’s gonna be, it’s gonna be 56789 years of gnashing a teeth. And they told you they are. When they, when this pandemic hit and everybody stayed home and everybody went out and they bought a whole bunch of homes and they were spending $100,000 over asking price with no inspection. And then they were saying, we gonna work from home forever. You don’t think that they was already planning on what was happening when it comes, when it came to commercial real estate, why do you think that mayors and governors and legislators started trying to work so feverishly with these companies to get them to go back into the office so that they wouldn’t have a default, a major default among all of the commercial real estate within a cities.
Why do you think that? So listen, productivity went up. They say that productivity went up when people were working from home. Yet they started to force people back into a hybrid schedule. Why do you think that that happened? Why do you think that that happened? If productivity went up, but they want you to go back into the office, why do you think that happens? Because we’re all interconnected. And then it becomes a trickle down effect, right? Because if nobody actually goes into work, then they have no reason to go out to lunch, which then supports the small business owners.
If nobody goes out to a game, then you have no reason to go out and buy a hot dog or to buy some cotton candy or a t shirt or the vendors or, you know, use public transportation and tax dollars and regional economic activity. I know Detroit literally just hosted the NFL draft. We broke records every single day that the NFL draft was here. Right. The economic impact is major if you don’t think that. I see so many people. I was just ratting on the people movie yesterday, right. And I went and visited a new restaurant.
It was called Gillies. Gillies is the new hotspot that was created by Dan Gilbert. And it opened around the same time that the NFL draft was here. Right. And Dan Gilbert, it was created in honor of his son that passed away. And it was popping. And I talked to a couple people there, and some of the people there are people that flew back that came in for the draft and said that I’m here to prospect. And me and Rita was looking like, prospect what? And I asked him, I said, prospect what? He says, oh, we thinking about investing here.
And so the economic impact of having people participating, going outside, spending money, interacting with each other, going on dates, creating businesses, and then the trickle down effect of what happens when you are out there and active Detroit did one of the smartest things ever. They made all of the public transportation, especially down in this regional area, free. People mover was free. The queue line is free. All of that stuff is free. So they made it easier for you to be able to get around the city and do what it is that you wanted to do, instead of being hamstrung by how much it costs for you to do so.
And what that did was it spurred additional economic activity that ultimately went inside of the city’s coffers. And so now you see all of these buildings going up and all of these people are starting to rent places, and people like me is moving back down in the city and getting corporate offices. At first I started and I got my office down here, and my building is. My building is completely rented out. And then I went down and I got a corporate penthouse. And now that’s. There’s more money going over there right next to my building. They broke ground right after the NFL draft, and they building a brand new hotel and more residences and more and more housing.
What I’m telling you is that everything that we do is interconnected when it comes to the success of an economy, of a city, of a state. All of that, they don’t just tell you to come back into the office because it’s good for work culture. They telling you to go back into the office because other people have a vested interest in you being there..
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