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"How does this turn into something much worse? The greatest problem would come if banks’ solvency came into question — if there were reason to doubt that their loans would be repaid. And the area of greatest concern here, as Points of Return has pointed out before, is commercial real estate. This is what Chris Watling, of Longview Economics in London, has to say:
"Troublingly, the mid-sized banks are the main lender to the commercial real estate sector. Since the global financial crisis (and reportedly due to the regulatory structure which was brought in at that time), the mid-sized banks ($10 billion to $250 billion in assets) have doubled their amount of outstanding commercial real estate lending versus that of the large banks (i.e. those banks with assets greater than $250 billion). On latest data, the mid-sized banks have a $1.3 trillion commercial real estate loan book, versus $738 billion for the largest banks."
So the banks under most pressure of late are most exposed. And of course there is reason to worry about the chances that office property, in particular, ever makes a comeback. Most of us know this from personal experience, but objective data make it clear that office use is still way down from before the pandemic. Vacancy rates, as illustrated by Longview Economics, remain infeasibly high"