US Federal Reserve ‘Commercial Real Estate Risk’ Korea Jeonse Deposit Refinance Fraud Derivatives ‘Credit Crunch’
The U.S. Federal Reserve issued a report on the risk of commercial real estate loans, and local banks, where loans are concentrated, are losing up to 10% as deposit outflows increase.
According to the “Financial Market Trends” announced by the Bank of Korea on the 11th, as of the end of April, household loans increased by 2.3 trillion won to 1052.3 trillion won, and loans to borrowers (balance of 803.9 trillion won) increased by 2.8 trillion won from the previous month.
On the other hand, credit loans enjoyed 500 billion won in other loans (balance of 247.3 trillion won).
The number of borrowers who applied for debt restructuring to the Credit Recovery Commission in the first quarter of this year was 46,067, a 43.9% increase from 32,005 in the first quarter of last year, and a 15.9% increase from the previous quarter.
Yomiuri reported on the 12th that PacWest Bancorp, a local bank holding company in California, USA, had about 10% of its deposits leaked by the 11th, and its stock price fell 23% on the New York Stock Exchange on the 10th.
Yomiuri continued, “In the United States, three medium-sized banks have failed in succession since March, including the First Republic Bank (California) bankruptcy on the 1st, and credit uncertainty has not stopped.”
Regarding commercial real estate risk in its annual Financial Stability Report, the US Federal Reserve said, “The rise in interest rates over the past year ‘increases the risk’ that commercial borrowers may not be able to refinance their loans at the end of their loan term.” "It is still 'rising', and the magnitude of the correction in real estate values could be significant and thus lead to credit losses for commercial real estate debt holders," it said on the 9th.
The New York Times, citing the report, said "many of these holders are banks, especially smaller banks. Mid-sized and regional banks, such as Signature First Republic, which went bankrupt earlier, provide the majority of commercial real estate loans to businesses." As well as being part of a much larger market, banks typically package loans into complex financial products and sell them to investors, allowing the bank to raise more money for new loans.”
Commercial real estate, the Fed points out, added $2.3 trillion to the national economy last year in a low interest rate environment.
The U.S. Securities and Exchange Commission (SEC) has not indicated the deposit balance for PacWest Bancorp, which has grown in trouble, but the balance at the end of March was about $ 28.2 billion, a 17% decrease from the end of December last year. Massive deposit outflows were triggered by media reports that restructuring measures were being considered.
Pacific Western Bank, a subsidiary of Pac West, ranked 53rd in the United States with total assets of about $41 billion at the end of last year.
Regarding the commercial real estate crisis, the NYT said, “Commercial real estate includes new construction loans, mortgages, and loans for managing multi-family apartment complexes.” A market of more than $7.2 billion has been formed, but bond issuance has plummeted this year,” he said on the 22nd of last month.
Korea, where deposit fraud continues to break out, shows a typical example of commercial real estate loans, extending to additional investment and deposit loans as credit loan derivatives based on deposit refinancing, including apartments and single-family houses and low-cost multi-household houses.
Unlike the U.S., Japan, and EU, which include their own housing costs in the consumer price index, the Bank of Korea intentionally lowers the consumer price index by 20-30% compared to the U.S., and continues to stimulate the economy by expanding credit at low interest rates. This leverage is growing, and it is exposed to a credit crunch due to the recent high interest rate.
The Fed's report said of the commercial real estate crisis, "banks and other financial institutions could further reduce the supply of credit to the economy." “If banks withdraw dramatically, there could be a knock-on effect.”
"Declining profits for non-financial companies may increase financial stress and defaults on debt for some companies," the Fed report said.