In July, German lender, Commerzbank, sold two commercial real estate portfolios for around $2.9 billion.

You can read about this here.

It’s not a particularly remarkable story but I am bringing it to your attention because it’s an important part of the 18 year cycle, particularly the first half of the cycle – the de-leveraging process.

Note some of the key facts in the article – all classic elements of the cycle:

  • The bank had to be bailed out by the German government with an $18.2 billion emergency investment at the height of the financial crisis in 2008/09. Note that this is the same German government that has since been criticizing peripheral Eurozone countries about their profligate lending. In fact, at the start of the GFC, German banks were more highly leveraged than banks in the US, UK, Spain, Ireland…or even Greece.
  • The bank is selling off part of its commercial real estate loan book, which it describes as “non-core” assets – compared to its “core” ones – which are the loans it supplies to businesses looking to expand, invest, create jobs do all of the things that generate economic growth
  • This will help the Bank meet new banking regulatory requirements (Basel III) under which the Bank needs to hold more capital relative to its assets. It recently raised $1.4 billion by issuing more shares to further meet such requirements.
  • Note that the discount (that is the amount by which the sale price is below the outstanding value of the loans) on the portfolios being sold is only 3% – this is significant because this means that the value of the real estate has recovered to levels seen when the loans were made, prior to the financial crisis.

Pay attention to articles like these. This is the cycle in action.

Banks can only really start to lend to the economy properly once they have got rid of the loans they made in the prior cycle. It takes several years for banks to do this, because they need to see a recovery in the underlying value of the real estate so that they minimize losses and because they have a lot of real estate on their books.

And they have to find buyers – the more the better to generate competition and increase the sale price (which also takes time). Many of these assets are now being snapped up by other banks and institutional investors.

It is only once this unwinding/de-leveraging process has completed that banks can focus on their “core” activities, which is lending to businesses that generate wealth within the economy. The article notes that Commerzbank is a “key lender to the small and midsized companies that make up the backbone of Germany’s economy”. Such companies innovate, create jobs and drive economic growth.

Only when such companies start finding credit easier to obtain does the next cycle gets fully underway.

This means that the “recovery” so far has really only got us back to the starting blocks. The race will start now and run into the middle of the next decade.