(
Upon the first to fall, we immediately urged increased diligence concerning the safety and quality of banks and banking relationships.3 We advised commercial bank customers to review and memorialize their decisions regarding the safety of their bank deposit funds that exceed the standard
Discussing and deciding this issue, so long as it is performed with due care and in good faith, entitles fiduciaries to the shelter of the "business judgment rule," which is intended to keep their decisions from being second-guessed by a court. We also advised holders and potential drawers of letters of credit issued by the failed banks to individually review their situations concerning whether the letters would need to be, or should be, replaced or not.
In the ensuing six months, while there have not been any more large bank failures and the overall economy and economic outlooks have improved, heightened diligence nonetheless remains warranted for commercial bank customers.
Recently, the largest banks have written off approximately
According to the
Reuters states that "[d]eposits at the
Since then, as interest rates have continued to rise deposits at two of the largest
Deloitte notes that while economic growth has slowed to a crawl in 2023, it has not declined enough to merit the label of a recession.8 It predicts a 60% likelihood that the economy will nonetheless slow substantially in the second half of 2023, as lending standards are tightening and business investment remains soft.
But it also recognizes a 40% chance that either inflation will come back and settle in at about 6%, further damaging the
JPMorgan opines that "a recission appears off the table this year" but regional banks are experiencing slower loan growth due to headwinds to economic activity and commercial real estate challenges are mounting.
The three major rating agencies have, in examining the headwinds and challenges that banks are facing recently downgraded several bank ratings.
According to Reuters:
-
S&P cut its ratings on two mid-sized banks based on funding risks and higher reliance on brokered deposits, while three others were downgraded on large deposit outflows and prevailing higher interest rates.
Moody's lowered ratings on 10 U.S. banks and placed six on review for potential downgrades.- Fitch, the last of the three chief rating agencies, projected that several
U.S. banks could see downgrades if the sector's "operating environment" deteriorates further.10
As a rule, banks have not been immune from failure. There have been a total of 565 bank failures from 2001 to 2023.11 The
The GAO "found that failures of small and medium-sized banks [during 2008-2011] were largely associated with high concentrations of commercial real estate loans" and that "when these banks were exposed to the sustained real estate and economic downturn that began in 2007, credit losses on commercial real estate loans drove them to fail."13 "[T]his combination of aggressive growth strategies and weak risk-management practices [was] similar to what [the GAO] found in the
Commercial real estate loans may prove problematic for small community banks, but industry giant CBRE does not view them as a threat to the banking system: "Office loan losses, while challenging for banks, are unlikely to destabilize the broader financial system since office loans held by banks make up only 1.5% of assets in the banking system. The banking sector's projected losses on all CRE loans account for only 3% of banks' equity capital and disclosed reserves.
We do not see this as comparable to the GFC [global financial crisis of 2007-2011]".15 Still, the GAO cautions that "some businesses continue to offer employees a choice on whether to return to their offices full time or under some hybrid work arrangements ... [which] could continue to affect demand for office space and commercial real estate loan performance, creating ongoing uncertainty about the risks."16
In late
The rules, collectively known as the Basel III endgame, if finalized after going through the standard notice-and-comment rulemaking process which has been noticed to end on
According to CNN, US banks deemed systemically important globally — or, colloquially, "too big to fail" — would have to set aside an additional 19% of capital on average, according to the proposal.19 Banks with more than
The Wall Street Journal reports that "With the commercial-real estate market now in meltdown, those trillions of dollars in loans and investments are a looming threat for the banking industry — and potentially the broader economy. Bank exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses."22
Our takeaway for commercial bank customers is that while the overall economy is showing signs of resilience, the banking landscape remains fraught with uncertainty, which calls for continuing vigilance. The safety and quality of banks and banking relationships should remain a regular agenda item. Whether directors, specifically, have satisfied their fiduciary duties is a fact-bound determination.
The
Footnotes
1. https://bit.ly/3rhgnPs
2. https://bit.ly/46fb3e8
3. https://bit.ly/3rcBiDj
4. https://bit.ly/44Owi5y
5. https://reut.rs/44TtUdG
6. Id.
7. Id.
8. https://bit.ly/469rF7a
9. Id.
10. https://reut.rs/3ZgtcWR
11. https://bit.ly/44U2i8f
12. https://bit.ly/3ZhZocc
13. Id.
14. Id.
15. https://bit.ly/46aXNaC
16. https://bit.ly/3ZhZocc
17. https://bit.ly/48uzpmn
18. https://bit.ly/3PENxBX
19. https://cnn.it/3PENw0R
20. Id.
21. Id.
22. https://on.wsj.com/46eKAxA
Originally published by Thomson Reuters - Westlaw Today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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