007. Relevant Lessons from 1980s Banking Failures

Episode Transcript:

As a seasoned commercial real estate professional with over a decade of experience, I understand the crucial role banks play in our industry. The recent failures of Signature Bank and Silicon Valley Bank have highlighted the importance of being knowledgeable and prepared for such events. In today's commentary, we'll draw comparisons between the banking failures of the 1980s and the current landscape, and discuss how commercial real estate professionals can protect themselves and their assets.

Silicon Valley Bank, founded in 1983, catered to tech and life sciences companies, experiencing substantial growth during the investment boom of 2020-2021. However, their customers' deposits exceeded the Federal Deposit Insurance Corporation's insurance limit, raising concerns about the safety of uninsured funds. As a result, billions of dollars were withdrawn, leading to the bank's seizure.

In the 1980s, the economy faced stagflation, characterized by inflation, high unemployment, and stagnant demand. President Ronald Reagan implemented measures like the 1981 Economic Recovery Tax Act to stimulate the economy. While these changes initially benefited the commercial real estate sector, they inadvertently set the stage for the failure of savings and loan institutions (S&Ls). Rising interest rates and the devaluation of fixed-rate assets held by S&Ls caused significant losses, while relaxed lending standards and corruption further exacerbated the crisis.

Both the 1980s and the present day have witnessed struggles with inflation and rising interest rates. However, the current economic environment, impacted by the global Covid-19 pandemic, presents unique challenges that investors in the 1980s did not face.

So, what does this mean for the commercial real estate space? First and foremost, as depositors, it is crucial to understand how your money is used and protected. Regularly review your bank's reports, monitor stock prices, and familiarize yourself with their risk-management strategies. Stay informed about their investments and the current yield curve. Knowledge is the key to protection.

Furthermore, diversifying capital allocations is a prudent approach. The old adage of not putting all your eggs in one basket holds true for commercial real estate banking as well. By diversifying your holdings, you can mitigate the risk of a bank failure impacting all your assets.

Lastly, closely monitor your cash flow forecasts and regularly update them. Focus on both short-term and long-term financial planning. Ensure your short-term cash flow can handle any unexpected liquidity issues that may arise due to economic indicators. While it's easy to become fixated on long-term goals, having emergency reserves to cover operating expenses will provide a safety net during challenging times.

In conclusion, it is essential to know your finances inside out, stay informed about your bank's operations, and take proactive measures to protect your investments. By understanding historical patterns and learning from past banking failures, commercial real estate professionals can navigate the ever-changing landscape with confidence. Don't wait until it's too late. Stay vigilant, be prepared, and secure your financial future.

This is Tyler Cauble, signing off.