Capital Economics warns of "doom loop" risk for commercial real estate and smaller banks.
Capital Economics warns that commercial real estate's link to smaller banks in the US is vulnerable and has not received enough attention after recent strain in the banking system. Smaller US banks account for 70% of outstanding loans to the commercial real estate sector, and a pullback in lending would likely add downward pressure on capital values. A "doom loop" could develop between smaller banks and commercial property, warns Capital Economics, in which concerns about the health of these banks leads to deposit flight, causing banks to call in commercial real estate loans, which then accelerates a downturn in a sector that forms a key part of its asset base, which intensifies concerns about the health of the banks and thus completes the vicious cycle.