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SINGAPORE — The commercial property costs have dropped this year because retail businesses were interrupted, and individuals stopped going into their offices. Based on the latest report, this situation could result in heavy losses for banks.
Adam Slater of Oxford Economics stated in a report that in the past downturns, the commercial property loan losses had been “heavy,” and there were alarming signs that such a specific trend could redo during this slowdown caused by the coronavirus.
Slater said that these commercial property loan losses would “materially erode” financial institution capital in a worst-case scenario.
“Giant (commercial real estate) price declines typically translate into huge losses for financial institutions. Write-offs of (commercial real estate) loans have a big contribution to overall bank losses in the last two major downturns.”Adam Slater
For example, during the great financial crisis in 2008, those loan losses accumulated between 25-30% of the whole loan write-offs in the United States.
Today, such risks look highest in the United States, Australia, and other parts of Asia, such as South Korea and Hong Kong. Lending growth in these economies has increased with “significant” loan exposure. However, commercial property costs are already slipping, especially in Hong Kong, as said by the report.
Oxford Economics assessed 13 significant economies and discovered that write-offs of 5% of loans would amount to a loss between 1% and 10% of financial institutions’ tier 1 capital, their fundamental funding source that includes earnings and equity. It said that the massive effect would hit Asia.
The bond investors might also be at risk.
Based on a report, around half of this sector’s lending is not from the bank mortgages in the United States, including its bonds’ issuance. In Asia and Europe, the borrowing proportion through the non-bank sector has increased to 25% or more in the latest years.
“In the case of property funds, (commercial real estate) downturns could see a rush by investors to redeem their holdings leading to fire sales of assets — amplifying price declines and broader loan losses.”Adam Slater
However, he said that there is one bright portion. Banks now are in better shape to take them in than it was a decade ago. Their leverage ratios and capital were about double the levels compared years ago.
Reforms were there to reduce risks and enhance the global banking industry’s resilience by keeping reserve capital and specific leverage ratios following the financial crisis.