Washington Post (WAPO) financial news editor David J. Lynch warns Signature Bank’s third-quarter earnings has buried in it evidence of a financial storm that could be about to hit the U.S. economy.

While the Covid-19 pandemic rages across the country and we are hitting new highs of total infections (10.7 million), daily infections (142,900), hospitalizations (65,000), and the total number of fatalities have just hit 247,000 .

It’s clear that President Trump and his administration are pursuing a strategy of herd immunity even if they don’t admit. This is what happened when you have an incompetent President and White House that is willing to take direction from an unqualified person embodied by Dr. Scott Atlas, who is nothing more than a glorified radiologist who has no infectious disease qualifications.

If Dr. Fauci is right and we see the beginning of a vaccine rollout in April of next year, the coronavirus pandemic could infect 20 million and kill 400,000 to 600,000 by the end of February 2021 and 600,000 to 800,000 by May 2021. The pandemic is more serious now than ever before. We are clearly in its third spike of this first wave here in the United States and are threatening to develop a second wave that as we enter dreaded winter flu season.

Meanwhile, President Trump, his administration, and Republican sycophants in the Senate are taking no action to pass any legislation to soften the ravages’ blow on the U.S. economy. We are now amidst the worse eviction and unemployment crises since the great depression.

David J. Lynch, one of the Washington Post better known financial news editors, may have found evidence of the financial crises being created by the pandemic is about to get worse. It is being buried in the fine print of Signature Bank’s third-quarter earnings.

“The Manhattan bank last month set aside nearly $53 million to cover potential loan losses largely due to the coronavirus pandemic’s impact on the U.S. economy.”

“Lending money to shopkeepers, landlords and hoteliers in places such as Times Square or SoHo used to be considered almost a sure thing. But that was before the contagion emptied New York City’s skyscrapers, hotels, apartment buildings and stores, leading the president of the United States to call it “a ghost town” and forcing some borrowers to stop making loan payments.”

“Now Signature, which has nearly 60 percent of its portfolio tied up in the commercial real estate, is bracing for the fallout. The bank’s bad-loan write-offs, though still modest, are creeping higher. Despite years of steady profits, investors have punished the stock, which even after a recent rebound has lost 27 percent of its value this year.”

“If U.S. banks absorb big losses on their $2 trillion in commercial real estate loans, the entire economy will suffer. Just the fear of looming bankruptcies and defaults has prompted banks in recent months to restrict new lending, at a time when the virus-ravaged economy needs all the help it can get.”

“Tighter credit standards make it harder for commercial borrowers to roll over old loans as they come due and could starve other businesses of capital needed to expand and hire more workers. If the economic downturn proves lengthy, mounting losses could even undermine financial stability, according to some Federal Reserve officials, economists and credit analysts.”

Adam Slater, the lead economist for Oxford Economics in London, described the worsening economic climate this way…

“This is something that could make a bad situation worse,” said, “What we don’t want is to get really nasty stresses and strains in the financial system from something like this.”

David J. Lynch follows through to consider the approaching danger by writing…

“Today’s worries are grounded in history. Banks have repeatedly failed after stumbling into big losses on commercial real estate loans, from the savings-and-loan crisis of the 1980s to the Great Recession in 2008. According to Oxford Economics, U.S. banks lost $110 billion on commercial real estate in the last financial crisis, at least one-quarter of their total losses.”

“This time, the losses could be even worse, with the pandemic forcing a fundamental reconsideration of how Americans work, shop and live. With a highly contagious disease circulating in the country, tens of millions of people have been working for months from home, shopping online and only occasionally visiting shops and eateries.”

“If a coronavirus vaccine becomes widely available in the first half of 2021, people may revert to their old habits. But some societal changes may endure, especially if a vaccine takes longer to develop or offers only limited protection.”

“Such shifts would make downtown office buildings, hotels and stores less valuable, sending losses ripping through banks and bond investors that hold $3.4 trillion in commercial real estate debt.”

“Office Space, the largest single slice of the commercial real estate sector, already sees rents fall as vacancies rise. Property values eventually could plummet 20 to 35 percent, according to a recent Barclays report. Hotels and retail properties have been hit even harder.”

“Regulatory changes enacted in the aftermath of the 2008 crisis mean banks now are better armored against losses. But more than a decade of ultra-low interest rates has allowed financial risks to accumulate, which the pandemic is now laying bare.”

“The Federal Deposit Insurance Corp. (FDIC) regards 356 banks as “concentrated” in commercial real estate, based upon criteria such as the ratio of their CRE loans to their capital base and the pace of loan growth over the past three years.”

“Valley National Bancorp in Wayne, N.J., is the largest bank to exceed the regulatory guidance. Its CRE loan portfolio has grown by 81 percent in the past three years, according to S&P Global, which said in a recent report.”

Michael Hagedorn, Valley National Bancorp’s chief financial officer, told investors last month….

“We remain confident in our underwriting and believe we are well-positioned to navigate the current environment from a credit perspective.”

David J. Lynch then points out that…

“Community banks are particularly dependent on lending for commercial properties. These smaller banks get into trouble with these loans by growing too fast and expanding into geographic areas where they lack expertise, according to Bert Ely, a banking consultant.”

“Banks that exceed the FDIC criteria were “three to four times” more likely to fail than other institutions during previous downturns, according to a 2019 study by the Federal Reserve Bank of Philadelphia.”

Lynch quotes Pablo D’Erasmo, the author. “The CRE sector remains a potential source of instability for the banking sector…

“In the event of another such crisis, most banks would be affected, and many might fail,” wrote economist."

“In the second quarter, banks reported the largest percentage increase in charge-offs for bad loans since early 2010, according to the FDIC. They also nearly quadrupled the reserves they set aside to absorb loan losses.”

Lynch also quotes Cam Fine in his Washington Post article, the former president of the Independent Community Bankers of America sees tremendous danger…

 “I don’t see any way of avoiding a great deal of pain in the commercial real estate market in 2021. It’s almost inevitable.”

“My friends at the Federal Reserve and the FDIC are becoming increasingly uncomfortable with what’s going on in the commercial real estate world.”

Eric Rosengren, the president of the Federal Reserve Bank of Boston, according to Lynch, has…

“Sounded the alarm for years about banks and businesses bingeing on low-interest borrowing. In recent speeches, he has warned that commercial property values were artificially inflated by more than a decade of ultra-easy money.”

“As the pandemic shock makes existing commercial properties less valuable — because workers and customers are afraid to return to them — their owners will struggle to roll over their mortgages. Some will default, leaving lenders to absorb the loss and hobbling the economic recovery.”

Rosengren cautions…

“I am especially worried about a second shoe dropping that will particularly affect small and medium-sized banks, which provide a large share of commercial real estate loans and small-business loans.”

Rosengren said in a September speech put his concerns on the table…

 “A curtailment of credit resulting from such problems has caused serious headwinds to recoveries in the past and maybe a serious problem going forward.”

Rosengren’s concerns seem to be validated in that during the third quarter…

“Signature reported making $1 billion in new loans, a 75%drop from the previous quarter; though the bank says it has plenty of pending deals in the pipeline.”

The growing danger is also being confirmed by Fed Chair Jerome H. Powell, who told a House committee in September that regulators would try to help banks and their commercial customers ride out the pandemic…

“With smaller banks, the issue is there has been a 30-year trend of consolidation and banks going out of business, and that’s not a trend we want to do anything to exacerbate,” he testified. “Smaller banks are going to probably bear too much of the burden here. They have more exposure to real estate and to smaller businesses, which are probably more vulnerable and have less resources to deal with this sort of stress.”

David J. Lynch acknowledges in his WAPO article…

“Bank balance sheets remain healthy. But in past crises, losses were slow to materialize, not appearing until lengthy commercial leases came up for renewal. In the last cycle, losses did not peak until three years after the recession ended in June 2009."

"But the market for commercial mortgage-backed securities already is indicating what lies ahead. Wall Street banks such as Deutsche Bank, Goldman Sachs, and JPMorgan Chase have bundled about $550 billion worth of commercial mortgages into securities and sold them as investments to pension funds, life insurance companies, and mutual funds.”

Still, David J. Lynch sees trouble brewing…

“As the pandemic plunged the economy into a deep freeze this spring, the share of commercial real estate loans that were delinquent rose to 10.3 percent in June from 2.3 percent in April, according to Trepp, a provider of financial data.”

“Lenders have allowed some borrowers to delay payments or use loan reserves as a stopgap. That has brought down the share of delinquent loans to a still-high 8.3 percent, meaning borrowers are behind in their payments on commercial real estate loans worth about $45 billion, according to Trepp."

Manus Clancy, Trepp’s senior managing director, is warning…

“The disasters are retail and hotels,” Trepp is warning that borrowers have missed payments on nearly 20% of hotel loans."

To read the entire story written by David J. Lynch at the Washington Post, please click here…

                     Why banks may be on the verge of collapse