Commercial Real Estate In A Credit Crisis?

According to the Wall Street Journal, in a worst case scenario analysis, roughly $100 billion of losses could hit smaller banks by the end of next year. The root cause of which are commercial real estate loans.

Taking at look at 900 small to midsize banks across the US, the Wall Street Journal estimates that commercial real estate loans pose a massive threat to the banks' livelihood. Using a similar process that was used on the 19 'big banks' in the Federal government's stress tests, the Journal is seeing danger from the loans in the commercial real estate sector.

The study estimates a worst-case scenario in which unemployment hits 10.3%, which also means that banks would do better if unemployment topped out at a more manageable 8.9%. The contrast in the smaller banks losses to some of the larger banks the government is examining, has as much to do with investor interest as anything else. Some of the smaller banks, the Journal asserts, may not find the same kind of opportunistic investing when these smaller institutions run into trouble, meaning there is a likelier chance of those banks going under should the recession stretch on, which will further tighten lending markets.

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