Are Recent Bank Failures a Symptom of a Bigger Problem?

Recent bank failures have prompted some industry experts to question whether these incidents are isolated or indicative of a deeper systemic crisis in the American banking sector. Several factors are driving these recent bank failures, ranging from uncontrolled expansion and high-risk lending practices to regulatory shortcomings and poor corporate governance.

Still, there's another issue. Have you wondered about all those office buildings sitting empty since COVID-19 sparked the work-from-home revolution?

Commercial Real Estate in a Post-COVID World

Federal Reserve Chairman Jerome Powell recently stated that
the commercial real estate
problem is one that "we’ll be working on for years." He also noted that its impact on banking has just begun.

Unlike residential real estate, commercial properties are directly influenced by economic conditions. In times of economic slowdown, businesses often struggle or go under, which may result in them being unable to repay loans, thus raising potential losses for the banks.

However, office usage today is undergoing changes that are divorced from normal economic cycles.

Is it Different This Time?

While some larger firms have backtracked with return-to-work campaigns, many organizations have retained the work-from-home business model. So that means many of those office buildings are still sitting unused.

A recent segment on PBS examined this issue. According to the guests on the show, usual vacancy rates are 10-15%. But cities such as San Francisco are now experiencing a much higher vacancy rate of 33 to 35%.

Without enough tenants, many commercial mortgage loans are likely to default in the coming months or years.

Is This Really a Threat?

If the collateral for these loans was sound, that could help banks resell the buildings to make up for loan losses. However, based on recent sales, that looks highly unlikely.

One high-profile building in San Franciso recently
sold for a 75% discount.

In the U.S., many smaller banks are big commercial lenders.

And unfortunately, they don’t necessarily have the reserves to cover significant losses.

What Can This Mean for Retirement Investors?

No one knows for sure, but a large wave of defaults could create a wave of bank failures that could cause significant issues for the broader economy and markets. While the U.S. banking system has safeguards like the Federal Deposit Insurance Corporation (FDIC), its reserve capacity may not be sufficient in a scenario where multiple banking institutions fail at once.

Key Takeaway

If you're retired or planning to retire, what can you do? One strategy is to stay diversified so losses in one area will not overwhelm your overall assets. Another is to consider adding a guaranteed income product such as an annuity.

That way, you can ensure you always have money coming in to pay your monthly bills. Be sure to consult with a financial planner to ensure the benefits and costs of the annuity are reasonable for your needs. But that way, even if bank failures occur, a lifetime income option can help ensure you can pay the bills no matter what is happening in the financial world.


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