Aozora Bank Ltd., the 16th largest bank in Japan by market value, surprised investors with an announcement of an expected net loss of 28 billion yen ($191 million) for the fiscal year ending March 31, as opposed to a previously forecast profit of 24 billion yen. The shares fell by more than 20%.

This development follows similar issues at New York Community Bank in the US and concerns over bad loans in South Korea, indicating global worries about banks' exposure to faltering real estate investments. The 35th largest bank in the United States announced a net loss of $252 million for the fourth quarter of 2023. The bank's share price has dropped by more than 60% since last week.

Credit rating agency Moody's has since downgraded the credit status of New York Community Bank to 'junk,' painting a high risk of bankruptcy. This increases the likelihood of regulatory intervention at a time when Federal Reserve Chair Jerome Powell has warned that smaller banks may not survive problems in the office market.

by rising borrowing costs, particularly office properties have suffered due to the increase in remote work since the pandemic. Aozora, with a significant portion of its loan portfolio abroad, including $1.89 billion in US office loans, announced it had made additional provisions for bad loans and is accelerating the sale of securities to cover losses. The stock is now down 30% compared to a week ago. The Japanese financial regulatory body FSA continues to closely monitor the situation, given the deteriorating real estate markets in the US and Europe.

This reminds me of March 2023, when Silicon Valley Bank (at that time the 16th largest bank in the US by assets managed) was declared bankrupt, and $465 billion in market value evaporated. Shortly after the news, the price of gold rose by 10% in 10 days. The question now is whether customers of Aozora Bank and New York Community Bank will retain or lose confidence. A bank run could spell the end for these banks and could also spread to customers of other banks...
The problems in the US commercial real estate market - which have already hit banks in New York and Japan - reached Europe this week, with growing concerns about wider contagion risks. The most recent victim is Germany's Deutsche Pfandbriefbank AG, whose bonds plummeted due to concerns about exposure to the sector.

Will this be limited to these banks? Or will it cause more unrest in Europe?

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