Bad Property Debt Exceeds Reserves at Largest US Banks Amid Rising Delinquencies

Bad property debt is a growing concern in the US banking system. At the largest US banks, this debt has exceeded reserves, leaving many wondering what's next.

The largest US banks have seen a significant increase in bad property debt, with some banks' reserves not even covering half of their total delinquent loans. This is a stark reality, especially considering the banks' reserves are supposed to cover potential losses.

The rising delinquencies have put a strain on the banks' financial stability, making it essential for them to take proactive measures to address the issue. By doing so, they can prevent further damage to their reputation and the economy as a whole.

The top 6 US banks are facing a significant problem with distressed commercial real estate debt. Their reserves are barely covering the delinquent loans, with an average of just 90 cents set aside per dollar of commercial real estate debt on which a borrower is 30 days late.

This is a stark decline from 2022, when the same banks had $1.60 per dollar of distressed real estate debt in reserves. The value of delinquent commercial property debt has nearly tripled in the last year to $9.3 billion.

The big six banks - JP Morgan, Bank of America, Wells Fargo, Citi, Goldman Sachs, and Morgan Stanley - are struggling to keep up with the delinquent loans. The banks' exposure to the commercial property market has been a focus since the fall of several regional banks last year.

Here's a breakdown of the top 6 banks' average reserves per dollar of delinquent commercial real estate debt:

The decrease in reserves is a concern, as it may not be enough to cover potential losses. Regulators are taking a closer look at the banks' commercial real estate lending practices, and some experts are warning of potential losses of up to $60 billion over the next five years.

The loan reserve coverage for commercial real estate debt has taken a hit at the largest US banks. The average reserves for these banks have decreased from $1.60 to just 90 cents for every dollar of commercial real estate debt that is at least 30 days late.

The six largest US banks – JP Morgan, Bank of America, Wells Fargo, Citi, Goldman Sachs, and Morgan Stanley – now have just 90 cents set aside per dollar of commercial real estate debt on which a borrower is 30 days late.

The ratio of loss reserves to delinquent loans has dropped below 1 for Bank of America, Citigroup, Goldman Sachs, Wells Fargo, and Morgan Stanley. In contrast, JPMorgan has also decreased its ratio but still maintains it well above 1.

The value of delinquent commercial property debt has nearly tripled in the last year to $9.3 billion among the top banks. This has raised concerns about the possible consequences of a further deterioration in the sector.

Here's a breakdown of the six largest US banks' loan reserve coverage:

The decrease in provisioning came as the value of delinquent commercial property debt nearly tripled in the last year to $9.3 billion.