Trepp LLC

04/12/2019 | News release | Distributed by Public on 04/12/2019 10:58

How Have Bank CRE Holdings Fluctuated with Changes in Interest Rates?

After the Great Financial Crisis, the Federal Reserve set an aggressive monetary policy agenda in its effort to avoid a recurrence of the economic fallout. The Federal Funds Rate, through which the central bank controls the rate banks pay for overnight funds, was lowered. After clocking in at 5.25% in July 2007, the rate was a mere 0.08% at the beginning of 2012. Aggressive monetary policy during and after the recession impacted the rates banks paid out on short-term deposits, but have holdings of commercial real estate (CRE) assets by banks changed along with interest rates?

How Have Bank CRE Holdings Fluctuated with Changes in Interest Rates?

Since 2010, total CRE holdings of the 300 banks with the largest CRE exposures increased by $437 billion. That's more than half of the amount originally outstanding.

Quarterly changes in bank holdings have generally lagged changes in the Fed Funds Rate, which might indicate that bank lending increases in anticipation of healthier economic times. The Fed generally moves to increase its benchmark rate as economic conditions improve to help cool any potential overheating of the economy. However, changes in CRE holdings appear to be more closely related to changes in the 10-year Treasury yield.

The 10-year yield has fluctuated between 1.5% and 3% since 2010 (with outliers), which contrasts with its yield in excess of 5% just before the recession.

Between 2010 and the first half of 2013, average bank CRE holdings were flat at roughly $3.7 billion. When long yields climbed from 1.65% in the third quarter of 2012 to 2.73% in the first quarter of 2014, average CRE holdings of banks grew to $3.92 billion.

As rates dropped between 2014 and early 2015 - from 2.73% to a low of 1.94% - bank CRE holdings grew by a quarterly average of 1.9%.

With the second and fourth quarters of 2015 came a temporary reversal of that trend, which is when rates began to rise. Between the third and fourth quarters of 2015, bank CRE holdings grew 3.95% in Q3 and 3.85% in Q4. Then, when rates began declining again, growth in CRE holdings slowed to roughly 2% quarterly. By the second quarter of 2016, when the Treasury rate was 1.49%, average CRE holdings stood at $4.90 billion, up 34% from 2012.

The greatest level of CRE growth, 3.9%, was set in the third quarter of 2016 when average CRE bank holdings grew to $5.10 billion. That total was nearly $1 billion more than the volume held just after the recession.

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The information provided is based on information generally available to the public from sources believed to be reliable.