The Bank of Korea Says "Low Possibility of Systemic Risk Transmission from US Commercial Real Estate"

Bank of Korea Monetary and Credit Policy Report
SVB Incident Similar to Financial Crisis in Terms of High-Interest Shock
Low Possibility of Systemic Risk Development

[Image source=Reuters Yonhap News]

There is an assessment that the issue of commercial real estate in the United States is unlikely to escalate into a systemic risk.

According to the "Monetary and Credit Policy Report" released by the Bank of Korea on the 14th, the risk arising from U.S. commercial real estate (CRE) is considered unlikely to develop into a systemic risk due to the small scale of defaults and improved response capabilities of financial institutions and authorities.

Recently, foreign banks such as New York Community Bank (NYCB) in the U.S., Aozora Bank in Japan, and Deutsche Bank in Germany have announced losses related to CRE loans and additional provisions, raising concerns that the U.S. crisis could spread to other countries.

According to the report, the risk from U.S. CRE is mainly caused by the shock of high interest rates, similar to the global financial crisis and the 2023 Silicon Valley Bank (SVB) incident. During the global financial crisis, the high interest rate shock caused financial institution insolvencies through the real estate market. Subsequently, similar problems occurred in overseas financial institutions, showing patterns similar to NYCB.

The SVB incident is also similar to NYCB in that regional banks’ assets were concentrated in specific products such as government bonds, and high interest rates caused asset deterioration.

However, compared to the global financial crisis, risk factors have decreased. After the global financial crisis, financial institutions did not actively issue structured derivatives. As a result, most CRE loans were executed as simple loans or commercial mortgage-backed securities (CMBS), making related risk assessments easier. Additionally, bank regulations were significantly strengthened after the financial crisis, greatly improving banks’ capital soundness.

Unlike the SVB incident, the possibility of a bank run is also low. Silicon Valley Bank, which experienced a series of bank runs among small and medium regional banks, obtained 95% of its deposits from large depositors such as startups. However, in the case of NYCB, where CRE risk has been raised, this ratio is below 30%. The full protection of depositors during the SVB incident also greatly reduced concerns about deposit losses.

Expectations for monetary policy responses also differ. In March 2023, during the SVB incident, expectations for the Federal Reserve’s accommodative monetary policy response were low, but currently, if signs of CRE loan defaults spreading appear, the Fed is expected to respond swiftly.

However, the report pointed out that considering domestic financial institutions and pension funds have invested significant amounts in commercial real estate in major countries, it is necessary to strengthen monitoring of related risks.

This content was produced with the assistance of AI translation services.