Financial Titan Warns Of Impending ‘Distress’ That Could Devastate Small Banks

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Will Kessler Contributor
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One of the largest asset managers issued a warning Monday that there could be a fast-approaching wave of failures at regional banks across the country, according to Bloomberg.

John Murray, head of Pacific Investment Management Co.’s (PIMCO) global private commercial real estate team, warned in an interview that there were a large number of troubled commercial real estate loans on the market that could put small and regional banks at risk of failure due to huge losses, according to Bloomberg.

Smaller banks hold a disproportionate share of commercial real estate loans, and the value of those assets has been rapidly declining due to both a lack of demand and high interest rates that are increasing costs. (RELATED: Biden Admin Quietly Injecting Radical Policies Into Housing Market — And It Might Bring The Whole System Down)

“The real wave of distress is just starting,” Murray said about commercial real estate lenders, according to Bloomberg. Murray noted that there was a “very high” concentration of commercial real estate loans on regional banks’ books.

Demand for commercial real estate has been severely depressed since the onset of the COVID-19 pandemic, when many companies elected to or were forced to institute work-from-home policies, reducing the need for office space, while many companies have elected to keep those policies in place. High interest rates due to hikes in the federal funds rate are also making it more costly to take out and hold debt for developers and real estate owners.

The warning comes more than one year after Silicon Valley Bank failed following a bank run by panicked investors, triggering First Republic Bank and Signature Bank to also fail. The banks were mostly acquired and auctioned off by the Federal Deposit Insurance Corporation.

“As stressed loans grow due to maturities, however, we expect that banks will start selling these more challenged loans to reduce their troubled loan exposures,” Murray told Bloomberg.

Banks that take deposits are facing around $441 billion in maturing property debt this year, putting many commercial property borrowers at risk of taking on huge losses due to the depreciation of value on their assets, according to Bloomberg.

Regional banks have also largely not asked for extra down payments from commercial property borrowers in recent years to adjust for market changes, unlike larger banks.

PIMCO did not immediately respond to a request to comment from the Daily Caller News Foundation.

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