Economy,Strategy&FinanceCenter

BuildingStress:Are

USBanksHeadedfora

CommercialReal

EstateReckoning?

Banksarethelargestlenderstocommercialrealestate(CRE)andhavegrownthebusinessinthepastdecade.Theseloansare

comingdueamiddecade-highinterestratesandadropindemand

forofficespacestemmingfromhybridwork—upendinga

traditionallylower-riskbusinessforbanks.Financialinstitutionshaveyettofullycometotermswiththeirlosses;thereckoningiscoming.

TrustedInsightsforWhat，sAhead?

?Thelargestbanks,withover$250billioninassets,arelessatriskas

theyrecognizedproblematicCREloans,liftedloanlossallowances,possessanamplecapitalcushion,anddonotexhibitconcentratedCREexposure.

?However,small,midsize,andlargebanksarevulnerablebecausetheyhaveconcentratedexposure,fewerallowances,andlesscapitaltoabsorbCREloanlosses.Thesebanks,withassetsrangingfrom$100millionto

$250billion,willlikelyliftCREcharge-offsthroughout2024.

?Banks,especiallythosewithlessthan$100billioninassets,are

restrictinglendingtoCRE.WhilethisisreducingtheissuanceofnewCREloans,tighterlendingstandardscannotalleviateexistingconcentrationson

bankbalancesheets.

?Companieswillexperiencemorerestrictivefinancingconditionsasthereckoningunfolds,onethatwillbeworseinsomeareasofthecountrythanothers.Toremainnimbleandprudent,executivesshouldreviewdeposit

insurancethresholdsandensureadequateworkingcapitalbefore,not

during,thestorm.

Economy,Strategy&FinanceCenter

2BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

BankLendinginFocus

Ofthenearly$6trillionindebttiedtocommercialrealestate(CRE),banksarebyfarthelargestlenders,accountingforhalfofthetotallendingtothesector(seeFigure1).Banklendingto

CRErosesteadilyintheyearsbeforetheCOVID-19pandemic,aslendingconditionswere

relativelyeasyandinterestrateswerelow.Thiswasespeciallytrueformidsizebanks($1

billion-$10billioninassets)andlargebanks($10billion-$250billion).AccordingtotheFederalDepositInsuranceCorporate(FDIC),inQ42023,midsizebankshad34%oftheirassetstiedtoCREloans,upfrom26%adecadeago,whilelargebankssawtheirCREloanexposurenearlydoublefrom10%to19%overthesameperiod(Figure2).Smallbanks($100million-$1billion)hadthesecond-largestexposuretoCREattheendof2023,at27%ofassets.

Legend:Banksbyassetsize

Largest=Morethan$250billion

Large=$10billion-$250billion

Midsize=$1billion-$10billion

Small=$100million-$1billion

Smallest=Lessthan$100million

Figure1

BanksarethelargestlenderstoCREprojects

Note:DataasofQ42023andsourcedfromTablesL.219andL.220fromtheFlowofFundsAccounts.Totalassets

equal$5.8trillion,roughlytwo-thirdsofwhicharecommercialmortgagesandone-thirdmultifamilyresidential.CMBSstandsforCommercialMortgage-BackedSecurityandCDOstandsforCollateralizedDebtObligation.GSEstandsforGovernmentSponsoredEnterprise.

Source:FederalReserve,TheConferenceBoard,2024

3BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

Figure2

LargeandmidsizebanksareprimarilyresponsibleforCREloangrowth

Note:DataasofQ42023.FDICQuarterlyBankingProfile.Numbersinparenthesisindicatethesizeofbankassets.Commercialrealestateloansincludemultifamilyresidentialproperties,commercialrentalproperties,owner-occupiedstructuresandconstructionandlanddevelopmentactivities.

Source:FDIC,TheConferenceBoard,2024

ManybankloanstoCREborrowersaresooncomingdue,collidingwiththeharshrealityof

deterioratingCREfundamentals,asTheConferenceBoard

previouslydiscussed.

Banksholdroughly$439billioninCREloansthatmaturein2024and2025,accordingtoMSCIRealAssets(seeFigure3).Thisrepresentsroughly15%oftotalbanklendingtoCRE.Similarly,Trepp,a

realestateconsultancy,

estimates

thatjustover$500billioninbank-originatedCREloanswillmatureover2024-25,andnearly$1.5trillionwillcomeduethrough2028.

4BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

Figure3

Anestimated$500billioninCREloanssettomaturein2024-25

Note:DataasofQ42023.InternationalbanksincludethosebankswithheadquartersdomiciledoutsideoftheUS

NationalbanksincludelargebankssubjecttotheFederalReserve’sstrictestComprehensiveCapitalAnalysisandReview.Regional/localbanksincludeallotherbanks.CMBSstandsforCommercialMortgage-BackedSecurityandCLOforCollateralizedLoanObligation.

Source:MSCIRealAssets,TheConferenceBoard,2024

BankreportingonCRElending

CREloansarediverseandbanklendingvariesnotonlybytheloansubtypebutparticularlybyregion(seeFigure4).Theinformationweusetounderstandbanks’CRElendingwassourcedfromquarterly

reports

thatinstitutionssubmittoregulatorsliketheFederalReserveandtheFDIC.

RegulatorsincludethefollowingloantypesintheirdefinitionofCREforsupervisorypurposes:

?Securedconstructionandlanddevelopmentloans,includingforone-to-four-familyresidentialstructures;

?Securedcommercialrentalpropertyloans(e.g.,offices,hotels,nursinghomes);

?Securedmultifamilyresidentialrentalpropertyloans;and

?UnsecuredloanstofinanceCRE,construction,andlanddevelopment.

BankloanstothefourCREpropertysubtypestotaled$2.5trillioninQ42023,accordingtotheFDIC’sQuarterlyBankingProfile

data,

upfrom

5BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

$1.1trillionadecadeago.

Regulatorsexcludesecuredowner-occupiedCREloans(e.g.,hospitals,golfcourses,carwashes)fromtheirsupervisorydefinitionofCRE

becausethesourceofpaymentprimarilycomesfromtheborrower’s

businessrevenue,notrentalincome.TheConferenceBoardfollowsthesameapproachandexcludessuchloansfromthisanalysisunless

otherwisenoted.Owner-occupiedloanstendtobemuchlessriskythaninvestmentproperties.

Lessonslearnedfrompreviousepisodesofrealestatestressguidetoday’sbanksupervisionandreportingrequirements,butthecurrentenvironmentpresentsanentirelynewsetofchallenges.

ConstructionandlanddevelopmentloansaregenerallyconsideredtheriskiestCREsubtypebecausethepropertyisunderdevelopmentandnotgeneratingincome.Completionandbusinessriskarenotable

concernswiththeseloans.Asurplusofuncompletedresidential

constructionamidtheglobalfinancialcrisiscausedthelargestbankstoraisecharge-offsfrom2008–10forconstructionandlanddevelopmentloanstonearly6%ofallloans,comparedtojustover1%forincome-

producingmultifamilyandcommercialproperties.

Commercialrentalloanshavenearlydoubledinsizeoverthepast

decadeandarethesourceoftoday’srisk.Officeloans,historicallya

lower-riskfranchiseforbanks,faceanunprecedenteddemandshortfall,lowerincome,andrisingoperationalcosts.However,theFDICdoesnot

requirebankstoseparateofficepropertiesfromtheircommercialrentalpropertyloanportfolio,whichaddsuncertaintytosupervisionand

analysisoftheproblem.

Multifamilyresidentialpropertiesunderconstructionstandatarecordhigh,whichcouldcreateoversuppliedconditionsinregionalmarketsiftherateofpropertiescomingonlineexceedsdemand.

6BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

Figure4

BankCRElendingisdiverse;officeloansfallunder“commercialrental”

Note:DataasofQ42023.

Source:FDIC,TheConferenceBoard,2024

BankLoanLossesMountingwithMoretoCome

Thelargestbankshavetakensomeactiontorecognizetheproblemandhavethebalance

sheetstrengthandcapitalbasetonavigatethestorm.However,itislikelythatbankswiththemostconcentratedexposuretoCREwilldiscloseincreasingstressthroughout2024andinto2025.

TheFDIC’smostrecent

QuarterlyBankingProfile

fromDecember2024showedamodest

souringofCREloans,butnothingyetindicativeofameltdown.TableVintheFDIC’sreport

providesarangeofloanperformancestatistics(loanspastdue,noncurrent/delinquentloans,

andtheamountofbankcharge-offsasapercentageoftotalloans)forarangeofCREloan

typesorganizedbybankassetsize.TheConferenceBoardmanuallypulledthesedatastartingfrom2006,beforetheglobalfinancialcrisis,toseetrendsandmoregranulardata.

Thedatareveallowdelinquenciesandcharge-offsrelatedtoCRElendingdespiteweakeningfundamentals.Thisisnotaltogetherunsurprisingconsideringthesequencingofloanlosses:ittakes30daysfornonaccruingloanstomoveintopastduestatus,90daystoreach

nonperformingstatus,andpotentiallyaddedtimeforbankstorecognizeproblemloansas

charge-offs.Banksalsohavetheoptionofmodifyingandrestructuringloanswithinterestrate

concessions,loanextensions,andprincipalreductionstolowerpaymentsofborrowerswho

mightotherwisedefault—apracticeknownas“extendandpretend.”Thiscanforestallajumpinnonaccruals,charge-offs,andassetsalesofnonperformingloans(seeglossaryoncommon

bankregulatoryterms).However,theseactionsonlydelaytheinevitableifofficepropertyvaluesandtheirincome-generatingcapacityfailtorecover.

7BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

BankscanmanagethroughaCREdownturnbyliftingprovisionsforloanlossesasinsurance

againstfutureworseningeconomicconditionsordeterioratingpropertyfundamentals.Ideally,

bankswouldraiseloanlossreservessufficientlyingoodtimestoavoiddippingintocapitalandriskinginsolvencyduringacrisis.Inpractice,lossesaredifficulttoestimateinadvance,andtheprocessiscomplicatedbyimperfecttrade-offsembeddedinstandardizedaccountingpractices.Duringperiodsofstress,morefrequentbuildingappraisalscanaidbanks’lossestimates.

Unfortunately,appraisalestimatesoftenlagdownturns,andpricediscoverycanbeproblematicwhentransactionactivitygrindstoahalt.Accurateappraisalsrequirealargeenoughsampleofcomparabletransactions,butsellersmaynotbewillingtosellatadiscountiftheybelievethe

assetisworthmore.

Glossary:Commonbankregulatoryterms

Capital:Commonstockorshareholders’equitythatprovidesalayerofprotectionagainstloanandotherassetlosses.

Charge-off:Alenderrecognizesandexpensesalossonanasset.

Delinquentloan:Aloanthatispastdue.

Loanlossallowance:Areserveoranexpensesetasideforpotentialuncollectedloansandloanpayments.

Nonaccrualloan:Anunsecuredloanthatispastduefor90daysormoreandbelievedtobetroubledordoubtful.

Nonperformingloan:Loansthatare90dayspastdueandthosethatarenonaccrual.

Pastdueloan:Aloanwheretheborrowermissedaninterestorprincipalpaymentandissubjecttopenaltiesandlatefees.

Restructuredloan:Alenderoffersconcessionsandloanmodifications,suchasanextensionofthetermorareducedinterestrate,toa

borrowerfacingfinancialdifficulties.

Thecountry’slargestbanksreportedasizablepickupinnoncurrentloansandcharge-offsfor

loanstocommercialrentalandowner-occupiedpropertiesinFDICfilings(seeFigures5and6).Actionsdiscussedonfull-year2023earningscallsinJanuaryandFebruaryfromthelargest

banksareconsistentwiththeFDIC’sdelinquencyandcharge-offdata:

?

PNC:

ThesixthlargestbankintheUSbyassetsexpressedconfidenceinits8.7%reserveratioagainstfuturelossesinitsofficepropertiesbutraiseditsnetcharge-offstoaverageofficeloansinanticipationofadditionalfuturelosses.

?

WellsFargo:

ThelargestCRElenderintheUSandthirdlargestbyassetsnotedthattheofficesegmentexperienced“asubstantialdeclineinwhatpeoplethought

8BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

thevalueofthepropertieswasjustayearortwoago.”P(pán)ropertiesarebeingmarkeddownnotbecauseofsales,butratherbecauseoflowerappraisals.

Figure5

CREdelinquencieshaveshotupforbankswithassetsabove$250billion

Note:DataasofQ42023.Noncurrentloanratesrepresentthepercentageofloansineachcategorythatarepastdue90daysormoreorthatareinnonaccrualstatus.Thecategoryforbankswithassetsgreaterthan$250billionwas

introducedin2016whenenoughofthelargestbanksgrewtothissize.TheFDIClabelednonfarmnonresidentialloans“commercialrealestate”priorto2007.Nonfarmnonresidentialincludescommercialrentalandowner-occupiedloans.

Source:FDIC,TheConferenceBoard,2024

Figure6

OnlythelargestbanksarerecognizinglossesonCREloans

Note:DataasofQ42023.Thecategoryforbankswithassetsgreaterthan$250billionwasintroducedin2016whenenoughofthelargestbanksgrewtothissize.TheFDIClabelednonfarmnonresidentialloans“commercialrealestate”priorto2007.Nonfarmnonresidentialincludescommercialrentalandowner-occupiedloans.

Source:FDIC,TheConferenceBoard,2024

9BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

However,theuptrendindelinquenciesandcharge-offsismuchmoremutedwherealargeshareoftheCREloansreside:amonglarge,midsize,andsmallbanks,However,themostrecentearningsreportsbeganshowingrisingdelinquenciesandcharge-offsduringthefinalmonthsof2023fromhistoricallylowlevels:

?

IndependentBank/RocklandTrust:

TheNortheastregionallenderreporteda

charge-offrelatedtoanonperformingofficepropertyloanthatmatured,wasnotretained,andisexpectedtosellfor$0.75onthedollar.Theinstitutiondescribedthisprocessof“managingthrough”CREexposureas“earlyinnings.”

?Manyofthesmallestlistedregionalbankslikewisenotedselectednonperforming

CREloansandcharge-offsbutmostlydescribedthemasidiosyncraticcrediteventsnotpartofasustainedtrend.Someevendiscussedthehigherlendingrates

opportunistically,emphasizingthepotentialboostthismaygivetobankincomewhilediminishingthenegativeeffectofhigherinterestratesonassetvalues.

CREConcentrationRiskGreatestAmongBanksintheMiddle

Large,midsize,andsmallbankshavethehighestexposuretoCREasashareofassets(seeFigure2).TheyalsoexhibitthemostconcentratedholdingsintermsofCREexposuretothe

amountofTier1capital,ortheequitybankssetasidetoabsorblossessuchascommonstockandretainedearnings.Thesmallestandlargestbankshavefarlessconcentrationrisk.

Figure7showsbanks’totalCREloansrelativetoTier1capitalbybankassetsize.Midsize

bankslendnearly2.3timestheirTier1capitaltoCRE,whilelargeandsmallbankslendroughly1.5times.Commercialrentals,whichiswhereofficepropertyloanexposureresides,comprisesatleasthalfofCRElendingatthesesamelarge,midsize,andsmallbanks.Meanwhile,the

smallestandlargestbankshavemuchlowerratiosofCRElendingtocapital,at0.5timesand0.6times,respectively.

10BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

Figure7

Midsizebanks’CREloansexceedcapitalby2.5times

Note:AsofQ42023.CREincludesmultifamilyresidential,constructionandlanddevelopment,commercialrentalandunsecuredcommercialpropertyloans(excludessecured,owner-occupiedcommercialpropertyloans).

Source:FDIC,TheConferenceBoard,2024

Lookingatjustthecommercialrentalpropertieswhereofficepropertyloansareclassified

showsariseintheratioofcommercialrentalloanstorisk-basedcapitalto49%inQ42023,upfrom41%adecadeago.Thisratiodiffersonceagainbybankassetsize:small,midsize,and

largebankshavethegreaterratioofcommercialrentalloanstocapital,whereasthelargestandsmallestbanksarerelativelybettercapitalized(seeFigure8).

Figure8

Midsizebanks’loanstocommercialrentalpropertiesexceedcapital

Note:DataasofQ42023.Commercialrentalpropertyincludesofficespace.

Source:FDIC,TheConferenceBoard,2024

11BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

AbetterunderstandingofCREloanconcentrationscanbefoundusingalitmustestdesignedbyfederalbankingregulators.(Formoreinformationonthehistoryandmethodologyofthese

concentrationtests,pleaseseetheappendix).ThisreportscreensforbankswithCREloans

equalingorexceeding300%ofrisk-basedcapitalandCREloangrowthofmorethan50%over36months.

AccordingtoouranalysisofFDICdata,thenumberofbanksandtheshareoftotalCRElendingsubjecttotheseconcentrationcriteriaincreasedsince2020.Theanalysissuggeststhat:

?Thenumberofbanksflaggedbytheconcentrationtestrosetonearly300in2023,upfrom141in2020,representing13%ofCRElending(upfrom5.3%in2020);

?TotalCRElendingamongthesebanksexceeded$300billion(seeFigure9);and

?CREconcentrationsexistedmostlywithinmidsizeandlargebanks,andtoalesserextentsmallbanks.NoneofthelargestandonlyafewofthesmallestbankswereflaggedashavingconcentratedCRElending.

Figure9

MostconcentratedCREloanbooksarefoundinmidsizeandlargebanks

Note:Dataasofthefourthquarterof2023.BasedontheconcentrationtestwhereCREloansaregreaterthanorequalto300%ofcapitalandthethree-yeargrowthofCRElendingisgreaterthanorequalto50%.CREincludesmultifamilyresidential,constructionandlanddevelopment,commercialrentalandunsecuredcommercialpropertyloans(excludessecured,owner-occupiedcommercialpropertyloans).Numbersinparenthesisindicatethesizeofbankassets.

Source:FDIC,TheConferenceBoard,2024

TightenedCRELendingStandardsAmidHeightenedRisk

BanksrealizethattheyneedtoexercisegreaterprudencewhenlendingtoCREborrowersamidfallingpropertyprices,ariseinnear-termloanmaturities,highervacancyrates,higherinterestrates,increasedoperatingcosts,andanuncertaineconomicoutlook.

12BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

Reflectingthesestrainsandexposures,banks—especiallythosewithlessthan$100billioninassets—arerestrictinglendingforCRE.TheFederalReserve’sJanuary2024SeniorLoan

OfficerOpinionSurvey(SLOOS)

showed

continuedtightlendingstandardsforCREloansandweakloandemand,evenasconditionsthawedsomewhatfrompriormonths(seeFigure10).

TheFed’sSLOOSdividesCREloansintothreesubcategories:loanssecuredbycommercialrentalandowner-occupiedstructures(includingoffice);loansforconstructionandland

developmentpurposes;andloanssecuredbymultifamilyresidentialstructures.Lending

standardsatthesmallerreportingbanks(lessthan$100billioninassets)havenotthawedasmuchasthelargerbanks(greaterthan$100billion)forbothcommercialrentalandowner-

occupiedstructures,aswellasmultifamilyresidentialstructures.

WhiletighterlendingstandardscanhelpreducetheissuanceofnewCREloans,theycannotalleviateexistingconcentrationsfoundonbankbalancesheets.

Figure10

TighteningCRElendingstandardsamidpoordemandforloans

Note:DataasofJanuary2024.SeniorLoanOfficerOpinionSurveyonBankLendingPractices.Largebanksarethosewith$100billionormoreinassets,upfrom$50billioninsurveysbeforeDecember2023.

Source:FederalReserve,TheConferenceBoard,2024

AReckoningforSome,aTrainwreckoningforOthers

Banksareexpectedtomanagetheserisksbyincreasingprovisionsandcharge-offsforCRE

loanlossesin2024and2025.Thelargestbanksarealreadyaddressingtheproblemasseeninrisingdelinquenciesandcharge-offs(seeFigure6).However,apotential“trainwreckoning"isinstoreforsmall,midsize,andlargebanks.Todate,thedelinquencyratesandloanlossprovisiondataforthesebanksareinconsistentwiththemorethan20%declineinCREpropertyprices

13BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

fromtheir2022peak,accordingtocommercialrealestateanalyticsfirm

GreenStreet

(seeFigure11).

ThereareeffectivelytwooptionsforbankstodealwiththeproblematicCREassetstheyhold:

?Bankscould“ripofftheBand-Aid”andtakethepainallatonce.Suchamovecoulddepletebanks’loanlossallowancesandrequirethemtoraiseprovisions,inturn

causingabroaderandevengreatertighteninginlendingstandardsanddeepeningtheofficemarketdownturn.Thismightpromptamassivesell-off,notonlyamong

bankstocksbutthefinancialsectormorebroadly,asinvestorsattempttodigesttheshock.

?Alternatively,bankscould“pretendandextend”andhopefundamentalsrecover.

Twotrendssuggestthatbanksandborrowersaretakingthelatterapproach.First,thereisa

steadydeclineintheunusedportionofbanks’commitmentstoextendcredittoCRE,asignthatborrowersmaybetappingtheircreditlinesatatimewhenCREfundamentalsareworsening.

Second,banksarerestructuringarisingamountoftheircommercialrentalloansforborrowersfacingfinancialhardship.Althoughthesearerestructuredloans,theyarenotaddedto

delinquenciesifpaymentsremaincurrent.Therefore,afocusontheheadlinedelinquencyrateonCREloansundercountsthestresslendersandborrowersarefacing.

BankswilleventuallyneedtorealizetheselossesifCREfundamentalsdonotrecover.The

situationcouldmetastasizeifCREpricedeclinesintensify,stokingconcernsaboutcapital

adequacyanddepositorflightifbanksareperceivedasbeingatriskofinsolvency.Weevaluatethesescenariosinourthirdpaperinthis“BuildingStress”series.

Figure11

LoanlossallowanceshavenotrisentoreflectaseveredownturninCRE

Note:Dataasofthefourthquarterof2023.FDICQuarterlyBankingProfile.

Source:FDIC,TheConferenceBoard,2024

14BuildingStress:AreUSBanksHeadedforaCREReckoning?ConferenceB

ConcludingThoughts:FixYourRoofWhiletheSunIsShining

Corporationsandtheirexecutiveteamsshouldpreparefortheeventualfalloutfromthegrowingstressrelatedtobanks’exposuretoCRE:

Insufficientliquidityisadangerandriskforallwhenbanksraisecharge-offsand

recognizeproblemloans.Bankscanrapidlyfindthemselvesunderreservedasloanlosses

mount.Prudentcorporatemanagersextendthematuritiesoftheirdebtandaddacashliquidity

bufferbeforethestorm.Whileexpensive,theseactstobuildliquiditycanmeansurvival.

Companiescanalsobeopportunisticinadversemarketswhileothersarescramblingtosavethemselves.

Companieswillverylikelyexperiencerestrictivefinancingconditionsforloansandnew

debtplacements.EveniftheFederalReservecreatesanewliquidityfacilitytorelievestressonthefinancialsystemasithasdoneinpastbankingcrises,yieldspreadsoncorporate

borrowingwouldlikelywidenfromtoday’scompressedlevels,raisingthecostofcapital.

ImpactwillvarywidelybygeographygivenregionaldifferencesinbankexposuretoCREandthecorrespondingassetvalues.BecauseCREandcommercialrentalloanconcentrationsarefoundpredominantlyamongregionalandcommunitybanks,therewilllikelybemore

restrictivelendingstandardsforcompaniesservedbybankshavingalargershareof

problematicofficepropertyloans.Anystressinmultifamilypropertiescouldbetheproverbialstrawthatbreaksthecamel’sbackforbanksinregionsgrapplingwithofficepropertylosses.

CompanieswithdepositaccountsatbankswithhighCREloanconcentrationsshouldbeespeciallymindfulofliquidityneedsandthe$250,000

FDIC

depositinsurancelimitper

corporationgiventhepotentialforstressinCREloanportfolios.TheMarch2023bankingcrisiswasamajorsurprisebutneverspreadbeyondahandfulofthemorethan4,000banksintheUSanddidnotcreatebroaderoperatingproblemsforthebankingsystem.Thiswasdueto

quickactionsbylargerbankstoshoreuptroubledinstitutionsandregulatorstoprovideliquiditytothefinancialsystem,asTheConferenceBoardwroteaboutin

2023BankingCrisis:USBy

theNumbers,Six-MonthUpdate.

However,itwasavaluablewarningoftherisktouninsured

depositsandthebroadereconomyasbanksbegintorecognizetheseverityoftheirCREloanimpairment.Indeed,increasedbankmergersandacquisitionsandpossiblefailuresofthemostvulnerablebanksareanticipated.Aworst-casescenariocouldincludecontagiontoother

economiesandbankingdesertsacrosstheUS.

Specialattentionshouldbegiventononbanklendersandassetownerssuchaspensionfundsthatarealsorecognizinglosses.Whilethisreportfocusesontheregulatedbanking

sector,otherlenderswillfacelossesontheirCREexposure.Companypensionplanswithhighexposuretoprivaterealestatecouldexperienceunderperformanceandpotent