The leader of the bank for central banks—the Bank for International Settlements (BIS)—is sounding the alarm.
Just this week, BIS general manager Agustín Carstens told reporters that “The global economy is at a critical juncture.” And according to the bank’s just-released annual report, if inflation isn’t tamed and consumer prices remain high for much longer, banks could see credit losses of a “similar order of magnitude” to those of the 2008 financial crisis.
The comments are jarring, particularly on the backs of three bank failures earlier this year. BIS’s typical stances—which are usually more reserved—also lend gravitas to the statements.
“The resilience of the financial system will be tested again,” the report reads. “Pockets of vulnerability remain. Recent events have shown how the failure of even comparatively small institutions can shake confidence in the overall system.”
Why the Cause for Alarm?
According to BIS, elevated prices and historically high levels of both public and private debt is placing stress on the banking system. Inflation and the subsequent policy moves needed to fight it play a big role too.
“It is quite common for banking stress to emerge following a monetary policy tightening—in as many as a fifth of cases within three years after the first hike,” the BIS’s annual report, released last week, reads. “The incidence rises considerably when initial debt levels are high, real estate prices are elevated, or the increase in inflation is stronger. The current episode ticks all the boxes.”
The report comes just after the Federal Reserve’s June meeting, which saw no increase in the bank’s benchmark rate. The decision followed 10 straight rate hikes—one at each Fed meeting since March 2022. The hikes have helped inflation fall from over 9% to 4% in that timeframe.
“Admittedly, inflation has come down from last year’s multidecade highs,” Carstens said. “But these were largely the easy gains as commodity prices fell and supply bottlenecks eased. On core inflation, much less progress was made. And in much of the world, price growth in services—typically hard to budge—remains near its peak.”
For these reasons, the Fed’s pause will likely be temporary—and more tightening could be necessary to get inflation under control.
“The key policy challenge today remains fully taming inflation, and the last mile is typically the hardest,” Carstens said. “The burden is falling on many shoulders, but the risks from not acting promptly will be greater in the long term.”
What it Could Mean for Real Estate
If a banking crisis does come to fruition, there could be sweeping impacts on the real estate world. For one, lending would tighten considerably, making it difficult to finance deals and developments. Demand would then fall for housing, which could push prices downward.
Would they crash, though, similar to the Great Recession? That would require a number of dominoes to fall. There’d likely need to be widespread job losses, which would make it hard for many to make their mortgage payments. That would lead to a wave of foreclosures and a glut of housing supply that could tank prices.
Fortunately, that’s a lot of what-ifs. And according to BIS, there’s still a chance any huge losses can be avoided.
“There is an emerging sense that the global economy could achieve a soft, or soft-ish, landing,” Carstens said. “We all hope it does, but we must be ready to tackle the significant risks that stand in the way.”
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.