Banks Under Stress

Bank building and people drowning in the water
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In the aftermath of the Silicon Valley Bank collapse, the Federal Reserve created a special credit line to prevent the spread of a potential banking crisis. It exchanged the reduced value of paper assets of commercial real estate loans and even U.S. government securities for the artificially stated full values of those same assets as priced before the interest rate hikes. But this special credit line meant that the Fed itself was taking on the losses over the duration of this policy. With the line expected to be cut in March, the community and regional banks will have to retake those fallen assets unless the policy is renewed.

It is possible, therefore, that many community banks will come under stress and pull back on commercial real estate lending and refinancing. This looming crisis can best be avoided by lowering interest rates, which would then boost the value of those underlying assets. After all, inflation looks to be much calmer thanks to a sizable buildup of new apartments in recent years. Rents are falling in Austin, Texas; Nashville, Tenn.; Charlotte, N.C.; and other fast-growing markets because the positive demand is unable to match the large growth in supply.

Over the long term, rent growth will return in many markets since the economy keeps adding jobs, especially in states located in the South and in the Mountain time zone. But the movement of these underlying asset values could temporarily swing depending on Fed policy.

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