Chris Whalen’s YouTube video titled “Commercial Real Estate ‘Trainwreck’ Will Hit Banking System In 2024,” the banking expert discusses the challenges facing the banking industry due to commercial real estate loans. Whalen predicts that losses from commercial real estate workouts could impact bank earnings significantly. He compares the current situation to the oil patch crisis in the 1970s, which led to the Savings and Loan crisis a decade later. Despite positive macroeconomic data, Whalen expresses concerns over rising delinquency rates, especially for low-income households, and the potential for a widespread recession. Additionally, the speaker criticizes banks for their lack of understanding of duration and risk management and suggests active involvement from regulators. The Federal Reserve’s upcoming monetary policy moves are also discussed, with concerns regarding potential liquidity issues and an emphasis on the importance of careful management to prevent another financial crisis.
The cracks in the banking system that have started to form in commercial real estate, particularly office and multifamily properties, are not just isolated cases, but rather an indication of a larger issue, according to Whalen. Despite strong macroeconomic data, including record-low unemployment, rising consumer spending, and low inflation rates, many commercial real estate properties have faced challenges, with some landlords struggling due to pandemic-related income losses. Mike Barr, the Chairman of the Federal Deposit Insurance Corporation (FDIC), will likely have to make significant changes to the Basel 3 proposals due to opposition from policymakers, including Jerome Powell, the Federal Reserve Chairman, to avoid a potential war with the housing industry.
To improve the financial environment for banks, Whalen suggests the treasury and Congress need to start cutting the budget deficit, the Fed needs to have a more nuanced approach to market risk, and interest rates need to be normalized with less volatility. These actions, according to Whalen, would be beneficial to banks, which he believes are not built for the current volatility in interest rates.