In this week’s economic update, we are addressing concerns that have re-emerged about some U.S. regional banks and the impact of sustained interest rate hikes on commercial real estate loans. We revisit and explain the factors that drove the failure of a handful of U.S. regional banks last year, the concerns that have re-emerged, and the considerations to keep in mind when looking at larger banks and the impacts on the economy as a whole.
We are proud supporters of women in our community and recognizing and learning from the example our female entrepreneurs and leaders have forged in our region and beyond. In celebration of International Women’s Day, Elinesky Schuett was proud to sponsor or lead a number of events that champion female leaders in Guelph and Milton.
We highlight these events, including our own annual International Women’s Day event, below – thank you to all the incredible panelists and guest speakers for helping to inspire and support like-minded women in our region.
Economic Update
Global equity markets have trended higher in recent weeks, with performance in regions outside the U.S. being notably stronger. Investors have been focused on the employment picture and recent comments from the Bank of Canada and the U.S. Federal Reserve. Both institutions have reiterated the need for patience, awaiting further evidence that inflationary pressures are contained. In this economic update, we revisit the stresses that emerged in the U.S. regional banking sector about a year ago and address similar concerns that have resurfaced.
Recap of the U.S. regional bank failures and why
About a year ago, three U.S. regional banks were caught in a precarious position, which resulted in a significant exodus of deposits and the banks’ subsequent failure. This vulnerability stemmed from a significant decline in the value of the long-term fixed income securities on their balance sheets, caused by rapid and extensive interest rate hikes by the U.S. Federal Reserve. The disclosure of a substantial loss on the sale of these securities as well as a capital raise by one of these banks led to concern among depositors, initiating a cascade of withdrawals. While these banks were forced to shut down, policy makers stepped in to guarantee all deposits and set up a new lending facility to support banks under pressure. These measures helped to restore confidence in the banking system and to stem deposit outflows.
Concerns about U.S. regional banks re-surfacing due to commercial real estate loans
In recent months, concerns have re-emerged in the U.S. regional bank sector, with investors focused on potential losses in commercial real estate loans. This loan category has been under scrutiny for the past year given the impact of higher interest rates and pandemic-induced shifts, which have resulted in higher vacancy rates in certain properties like retail and office buildings. These loans are disproportionately held by small to mid-sized U.S. banks.
A particular bank recently drew attention as it surpassed the $100 billion asset threshold, subjecting it to stricter capital requirements. It had high exposure to commercial real-estate, but specifically to areas experiencing increased stress, such as rent-controlled multifamily units and office buildings in New York City. The bank disclosed material weaknesses in its loan risk assessment process, announced a provision for loan losses that was nearly ten times the expected amount, cut its dividend, replaced a number of senior executives, and was downgraded by credit rating agencies. Over the past week, it received a significant capital injection from several institutional investors, aiming to stabilize the company.
Concerns remain, but most banks are prepared appropriately
While this bank’s situation is unique, its difficulties have stirred up broader worries about commercial real estate and have prompted a reevaluation of risks among small to mid-sized U.S. banks. Overall, we believe the commercial real estate risks are generally well-understood by the markets, and many banks, particularly larger ones, have provisioned appropriately in preparation for any potential losses.
Summary
Importantly, the emergency lending facility and deposit guarantees which formed the backbone of the policy support last year should continue to give depositors confidence in the near-term. Even so, we will not be surprised to see some other regional banks show potential signs of weakness in the future as the lagged effects of higher interest rates continue to work their way through the economy. We take comfort from the credit and interbank lending markets which continue to behave well, indicating minimal broader financial market implications at this point.
Record attendance for our Annual International Women’s Day event
Building off the success of our 2023 event, we were proud to once again celebrate International Women’s Day, hosting 120 attendees at Cutten Fields in Guelph.
Our audience listened to and were inspired by our incredible panel of Karie Huisman (Elinesky Schuett) and guest speakers Denise Mansur (owner of Ms. Meri Mak) and Kathie Gilmour (owner/operator of Eleven Foods Inc.). Together, they spoke about their journeys as female leaders and entrepreneurs, the challenges they faced, and the advice they’d have for other women in business.
Power Panel Breakfast – with Milton Chamber of Commerce
On March 6th, we had the privilege of sponsoring the Milton Chamber of Commerce’s Power Panel Breakfast, hosting at Piper’s Heath Golf Course in Milton.
Elinesky Schuett’s Jennifer Goody-Brown did an amazing job moderating a panel of female entrepreneurs and leaders in the Milton community – the event proved to be a great platform for sharing each panelist’s personal and professional experiences, and all attendees left feeling supported and inspired. Thank you to our panelists: Maria Locker, Vikki Rozon, Tanya Vakil Fernandes, and Julia Vercillo for sharing your stories and advice, and for being role models for our community.
Thank you to everyone who came out, to the other sponsors, the Milton Chamber of Commerce, and everyone who helped make the event such a great success.
Inspirational Women’s Series – with Guelph Chamber of Commerce
On March 5th, we were proud to be presenting sponsors for the first Inspirational Women luncheon of 2024, hosted by the Guelph Chamber of Commerce at Cutten Fields in Guelph.
This year, our very own Karie Huisman had the pleasure of interviewing Marva Wisdom, founder of Wisdom Consulting. We learned more about Marva’s more than 30 years of volunteer leadership experience, her journey to becoming a business owner, and her many accomplishments (including the Order of Ontario and multiple leadership and impact recognitions).
Thank you to all attendees, the Guelph Chamber of Commerce, and all of those who helped make the day so enjoyable and engaging.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.