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FDIC Quarterly | December 17, 2021 |
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New Reports Highlight the Performance of Commercial Real Estate Sectors and Bank Credit Quality in the Pandemic and the Benefits and Challenges of Increased Liquidity From Record Deposit Growth in the Banking Industry |
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The pandemic contributed to stress across the commercial real estate industry in 2020, but the industry proved resilient in 2021, particularly in multifamily and industrial property sectors. In the office sector, uncertainty about future demand likely will persist as tenants evaluate the balance between onsite and remote work. Banks continue to hold a large share of the broader financial industry’s commercial real estate loans, and while credit quality remained strong during the pandemic, challenges to the lending environment exist, according to a new FDIC report, “Commercial Real Estate: Resilience, Recovery, and Risks Ahead.”
The FDIC found that:
- The pandemic significantly challenged several commercial real estate property sectors, such as brick-and-mortar retail, hotel, and office sectors.
- Market conditions improved with economic recovery in 2021, with the multifamily vacancy rate dropping to a 20-year low and demand for industrial space rebounding quickly.
- Some of the changes the commercial real estate industry experienced in the pandemic may be long-lasting and uncertainty in the office sector is likely to continue.
- The issues facing the commercial real estate industry after the pandemic will be important to a large share of the banking industry, as commercial real estate is the largest loan category at more than 40 percent of banks.
- Banks’ commercial real estate loan delinquency rates remained low through third quarter 2021, but pandemic-related stress and wind down of stimulus benefits will be part of the commercial real estate lending landscape ahead.
Banks have benefitted and been challenged by increased liquidity during the COVID-19 pandemic, according to a new FDIC report, “Implications of Record Deposit Inflows for Banks During the Pandemic.” Benefits of higher liquidity include less dependence on less stable sources of funding and an ability to respond effectively to unforeseen deposit account withdrawals. However, higher liquidity can also challenge bank earnings, depending on loan demand and the shape of the yield curve.
The FDIC found that:
- The U.S. government’s response to the pandemic, combined with increased personal savings, contributed to deposit inflows and historically high bank liquidity.
- Many banks responded by shifting their balance sheet composition to shorter-term, lower-yielding, and non-yielding assets.
- The shift in the composition of assets and a prolonged period of low interest rates caused the banking industry’s net interest margin to decline to its lowest level on record.
- The loans-to-deposits ratio reached record lows in 2020 and 2021, while the cash-to-deposits ratio rose to 1.6 times the pre-pandemic level and almost three times the previous trough in 2006.
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