This is from the FT this morning:
Almost three-quarters of HSBC's Hong Kong commercial property loan book was flashing warning signs by the end of June, as a prolonged slump in retail spending and sluggish demand for office space weighed on Europe's largest bank.
HSBC is Hong Kong's largest lender and the territory is the single largest source of income for the bank by geography. HSBC has made $32bn of commercial real estate loans in the territory, out of a $234bn Hong Kong loanbook.
Why flag this particular article on a morning when there is so much else that is going so wrong in the world? My reason is to highlight the fact that whilst the world's media obsesses about government debt, there is, quietly, but undoubtedly inevitably, a growing debt crisis developing in the world banking systems.
Throughout the world, vast quantities of bank lending are secured on domestic and commercial properties. In other words, banks make loans because they can place mortgages over properties that they believe they can sell in the event of their customer defaulting, thereby providing them with the security to make the loan that the customer in question wants, whether that is to buy the property in question or not. This is, of course, how the domestic mortgage market works. It is also how much of commercial bank lending works.
The reason for highlighting what is happening to HSBC in Hong Kong is that the basic assumption made by all bankers worldwide — that property is their security — is something that can go horribly wrong. It did, of course, in the US domestic mortgage market in 2008, and the global financial crisis followed as a consequence. There is every reason to think that this might happen again.
In Hong Kong, the risk arises because there has been a collapse in the rental market in that territory, with the FT noting that rents have fallen by approximately 20 per cent since 2022, whilst the vacancy rate is running at something like 19 per cent, meaning that the properties in question are earning nothing at all.
Elsewhere, the risks differ. For example, in the UK, where approximately 85 per cent of all loans by banks are secured by mortgages, the most significant overall risk comes from the uninsurability of many properties in the future because of the risk that they might be flooded by rising seawater levels. This is true for many domestic properties. However, the problem might be even bigger in the commercial sector. It is thought that up to 80% of all commercial bank loan portfolios are secured on properties that might be subject to this risk. Just look at the flood risk map for central London and you will see precisely why this is the case.
The point I am making, therefore, is a straightforward one. Whilst politicians, neoliberal commentators, the mainstream media, and others wish us to be distracted by the supposed risk that government debt poses to us, and to our grandchildren - the lucky ones of whom will inherit a share of it - the real likely debt risk that will create the next global financial crisis is almost certainly already on the balance sheet of most of the world's major bankers. That is because it is represented by overvalued property where the chance of loan repayment is low precisely because the properties in question will, at some point in the not too distant future, become unsaleable, either because of changes in the market demand for property within the commercial sector, or because flood risks will mean that the buildings in question will be uninsurable, creating a crisis for the banks because the security that they have for their lending will no longer be of any value.
To put this another way, the assumption that 2008 could not happen again is wrong. It could, because the next global financial crisis might well be precipitated by overvalued bank balance sheets, as was the case in 2008, even if the precise reasons for the overvaluation might change.
Bankers never, it seems, learn, and as fools in charge of money, they appear to be all too readily parted from it. We will, of course, all end up eventually paying the price for that.
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Looking at the size of the CBRA + interest I have concluded that the politicians have already anticipated the next crash to be honest. Having said that, we that lot of idiots in the financial sectors of the world, you never know do you?
There is a very short answer tot the question in this post’s title.
It is “yes”.
In fact it’s inevitable at some point. Too much debt everywhere.
When the proverbial hits the fan bankers are forced to recognise that the government too can create money out of nothing after putting a great deal of effort and money into propaganda and the purchase of politicans to say they can’t. Hypocrisy doesn’t come close!
I’d like to know what impact greater regulation since 2008 will have on these loans. We certainly do have more regulation of Credit Default Swaps and cecuritisation of loans than we did in 2008. My understanding is that CDS spread the problems much wider into the financial system and the mechanics of them were highly opaque at the time. Now that they’re more transparent and regulated, is it going to help?
No. They’be just changed the problem.
But CDS are also back, by the way. They just (financially) re-engineer them.
[…] sooner had I finished my post on why the 2008 global financial crisis could happen all over again than I noticed this in the […]
This is why I love your blog. You address the questions that arise for the reader, as you go, giving a thorough analysis. Sometimes I know too little about the subject to ask those questions, but by reading over time, I’m getting a much better picture of economics, banking, finance and other topics than from anywhere else I know of. I see more clearly now that I have an umbrella against the constant deluge of neoliberal spoutings from the mainstream media.
Many thanks for saying that Anne. I appreciate it.
This is not the first time i have read of the predicted alarming threat to the current economic system. Recently in the Guardian in the wake of the Californian wild fires Gunther Thallinger, one time CEO of Allianz Investment ,warned that at 3 degrees of warming the climate crisis cannot be insured against, covered by governments or adapted to. He warned of a climate induced credit crunch threatening the foundations of the financial system. If properties become uninsurable than the banks cannot do business. If the banks go bust again as they did in 2008 governments are unlikely to have the will or the means to bail them out.
What then?
There is no risk that we could not bail banks out. That is not an issue. It is the conditions that will be attached that matter.
Mmmmmmmmmm….. the elephant in the room is what will happen to pubic services if there is another crash. I suspect that having already socialised the losses from 2008, Governments will be encouraged to look for scapegoats yet again and this could very well be the end of them.
People want their house loans, car loans, loan loans, holidays and DIY. The markets and public services seem to compete with each other for the nations money and I expect the public sector to come off worse again if there is another crash.
Chaos is always the canvas upon which Neo-liberal/market led change is painted.
Chaos is a ladder, and crisis is an opportunity for profit. Have you heard of catastrophe bonds? Very lucrative business for certain folks. And every day it seems I hear of a new scheme to financialize the absurd. I wish it wasn’t so, but the economy is decoupling from things like value and fundamentals (i.e. regular business). In fact, I dare say decoupling is the survival strategy being deployed against crisis-related capital destruction.
So long as the wealth and future of the ultra-rich is tied to the banks, the banks will always come out unscathed. If and when that changes, then you might worry. That’s far future stuff, if it ever happens. Though I’m sure the crypto and gold crowd would like to tell you otherwise.
Ordinary folks won’t be so lucky. We’ll be taxed (or tariffed, or inflated) into the ground. As has already been pointed out, public services will be gone, replaced by privatized contracts. Property won’t be our problem, because we’ll own less and less of it. You only need insurance if you’re poor. The wealthy can pay in cash and write off any losses.
I think you are being too pessimistic – things will have to change before your apocalypse is reached, I think. But you could accuse me of optimism.
With respect, 3 degrees of warming making properties uninsurable and causing the banks to crash is one of the least important effects.
Low lying land being permanently flooded, food producing areas being unable to produce food, whole societies being flooded out of their land are probably going to cause a whole lot more harm than the banks crashing.
Agreed
It’s only a matter of time really. Without regulations and serious fines and particularly lengthy jail sentences, what’s to stop the unscrupulous?
The society we live in enables the unscrupulous and the amoral to act without scruples and without morality. Why are we surprised when they do just that?
Private debt levels and proper modelling of banks/money creation key, as Prof Dirk Bezemer’s 2009 analysis ‘No One Saw It Coming – Understanding Financial Crisis Through Accounting Models’ shows.
Spoilers : Many did, Steve Keen, Wynne Godley, Michael Hudson, Fred Harrison approaches amongst others analysed
https://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf
So did I
I guess that increased use of AI, replacing white-collar workers, will be another reason why businesses need less office space, which might lower commercial property values and add to banks’ troubles.