Investing
Quick shot: Risk watch: The composition of small bank loans
According to the FDIC, small banks made roughly double the loans to small businesses than large banks did in 2017.
According to the FDIC, small banks made roughly double the loans to small businesses than large banks did in 2017. That accelerated even more in the pandemic era, during which small banks drove the majority of lending growth. Today, estimates suggest that small banks hold 40% of all loans outstanding in the U.S.
In and of itself, that’s not a bad thing…but we’re looking closely at where those loans have been made. The data shows that about 45% of small banks’ outstanding loans are in the commercial real estate sector. Looking at it another way, 70% of total commercial real estate loans sit on small banks’ balance sheets.
The concern is that commercial real estate (think office buildings) could be due for tough times ahead. As the world grapples with a rise in work-from-home or hybrid work arrangements, some office space renters may decide not to renew their leases. At the same time, property owners may soon see their cost of financing increase as loan terms reset in an elevated interest rate environment. That means there’s potential for an unsustainable mix of falling revenues and rising expenses in the commercial real estate space.
Markets seem to be sniffing out the risks. The S&P 500’s Real Estate sector is underperforming the broad index by about -8.5% year-to-date. The shoe hasn’t dropped yet, but it’s a risk we’re watching.
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