Recently, the Office of Financial Research (OFR) published a
paper titled “Bank Health and Future Commercial Real Estate Losses,” examining which banks were more at risk of commercial real estate (CRE) loan losses. The paper noted that banks with high CRE debt concentrations were particularly exposed if the office sector continued to struggle.
According to the report, three bank failures in 2023 highlighted the risks associated with significant unrealized securities losses and the withdrawal of uninsured deposits. The report further stated that the loss of confidence from investors and depositors could reoccur, leading to “deposit outflows” from financially vulnerable banks. Banks with above-average CRE exposure, considerable unrealized securities losses, and a substantial number of uninsured deposits were deemed vulnerable. The report used public call report data to assess these vulnerable banks individually.
The report suggested that if future CRE loan losses mirror past downturns, many banks could see their combined CRE loan losses and unrealized securities losses exceed their shareholders’ equity. Additionally, the report noted this condition could persist even with an improved interest rate environment.
