US big banks face growing spillover risks from non-banks
20/06/2024 17:54
By Michelle Conlin
NEW YORK, June 20 (Reuters) - Non-bank financial
institutions pose an increasing risk to America's big banks, the
Federal Reserve said on Thursday in a post on the Fed's Liberty
Street Economics blog.
During times of heightened market-wide stress, demands for
liquidity mount on banks as non-banks seek term loans and lines
of credit. This escalating reliance on big banks could result in
"vectors of shock transmission and amplification, forcing
authorities to intervene and do so en masse," the Fed said in
the post, adding that the extent of these market disruptions
"could be rather severe."
Unlike large banks, non-banks operate under less restrictive
regulatory regimes and monitoring standards. The growing bank
and non-bank interconnectedness means that risks that used to
lie solely with banks are now being repackaged between banks and
non-banks.
The Fed estimates that the correlation of bank and non-bank
risk has risen steadily from about 65% prior to the 2008
financial crash to upwards of 80% now.
Commercial real estate is a place where this interplay could
become increasingly, and potentially painfully, apparent,
analysts say. One fifth, or $929 billion, of the $4.7 trillion
of outstanding commercial mortgages will come due in 2024,
according to the Mortgage Bankers Association. This looming
maturity wall comes against a backdrop of rising vacancies,
declining valuations and the Fed's higher-for-longer interest
rate environment.
Unlike residential mortgages, the Fed said CRE loans
typically have shorter maturities as well as bigger balloon
payments.
The Fed said its results underscore the need for financial
regulation and systemic risk surveillance that recognizes banks
and non-banks as "intimately interconnected."
(Reporting By Michelle Conlin; Editing by Chizu Nomiyama)
((Michelle.Conlin@thomsonreuters.com; 646-223-5660;))