S&P Global: Public US banks with high Commercial Real Estate (CRE) concentrations under SEC scrutiny.

S&P Global's Zoe Sagalow is reporting that the US Securities and Exchange Commission (SEC) is intensifying its scrutiny of public US banks with high concentrations of commercial real estate (CRE) holdings. This move comes as federal bank regulators, including the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Federal Reserve, increase their own examinations of banks' CRE portfolios for safety and soundness concerns.

Banks must now provide detailed disclosures about their CRE portfolios, including industry and geographic breakdowns, loan-to-value ratios, occupancy percentages, loan modifications, appraisal sources, and risk management practices. The SEC's involvement, typically outside its usual purview, indicates a significant shift in regulatory focus.

In April, Independent Bank Group Inc. and New York Community Bancorp Inc. received SEC letters requesting additional CRE details, following earlier letters to Western Alliance Bancorp and several community banks. This trend has been ongoing for at least a year, with the SEC sending numerous letters seeking granular CRE data, particularly breakdowns by industry.

Despite the SEC's lack of authority to demand changes in banks' lending behaviors, its increased focus aims could be to enhance transparency for investors. Experts speculate that the SEC's actions might be driven by concerns highlighted in the Financial Stability Oversight Council's latest report, which identified CRE as a potential vulnerability for banks.

Again, it is unclear why the SEC is probing CRE books, especially since the SEC does not have authority to demand banks' change their lending behavior like the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve do.

It is also possible banking agencies asked the SEC to get involved.

Interestingly, this comes on the heals of today's Office Financial Research reporting that 764 banks with $1.2 trillion in assets had unrealized losses equal to 75% of shareholders’ equity, including 120 banks with $130 billion in assets and a CRE concentration of 25% or more.

If CRE loan losses hit 4%, 229 banks with $542 billion in assets would be underwater. At an 8% loss rate, 278 banks with $614 billion in assets would be affected.

During the 2007-2009 financial crisis, CRE loan losses peaked at 7.3%. If banks faced a similar rate today, they would incur a $163 billion charge-off. Even at a 4% loss rate, banks would see an $89 billion impairment.

TLDRS:

• S&P Global's Zoe Sagalow is reporting the SEC is intensifying scrutiny of public US banks with high concentrations of commercial real estate (CRE) holdings.
• Banks must provide detailed disclosures about their CRE portfolios, including industry and geographic breakdowns, loan-to-value ratios, occupancy percentages, loan modifications, appraisal sources, and risk management practices.
• Independent Bank Group Inc. and New York Community Bancorp Inc. received SEC letters in April requesting additional CRE details, following similar requests to Western Alliance Bancorp and several community banks over the past year.
• Experts speculate that the SEC's increased focus on CRE could be driven by concerns highlighted in the Financial Stability Oversight Council's latest report, which identified CRE as a potential vulnerability for banks.
• The Office of Financial Research reports that 764 banks with $1.2 trillion in assets have unrealized losses equal to 75% of shareholders' equity, and CRE loan losses of 4% could put 229 banks underwater, while an 8% loss rate could affect 278 banks, recalling the peak CRE loan losses of 7.3% during the 2007-2009 financial crisis.
• Even if interest rates decrease this year, hundreds of banks with substantial total assets remain at risk unless they significantly reduce their CRE exposure or bolster their resilience.
• Fed Chair Jerome Powell testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, highlighting economic expansion despite moderating GDP growth in the first half of the year."we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. Incoming data for the first quarter of this year did not support such greater confidence."
• On the consumer side, Consumer spending remains robust, with moderate growth in capital spending and residential investment.
  • The labor market has stabilized with a 4.1% unemployment rate and an average of 222,000 payroll job gains per month in the first half of the year.
  • Inflation has eased but is still above the Fed's 2% goal, with total and core personal consumption expenditures (PCE) prices rising 2.6% over the past 12 months
  • Longer-term inflation expectations remain well anchored.
• A combination of slower wage growth, higher interest rates, and depleted savings indicate that the headwinds will continue against consumers and this will continue to play heavily on consumer spending moving forward.
  • Reminder, consumer spending is a major factor in the U.S. economy and its GDP, it goes down, companies fail.
• I believe inflation is the match that has been lit that will light the fuse of our rocket.