The Banking Crisis and You
This is Part 3 of an article on the recent banking crisis in the U.S.
Part 1 (What Caused the “Run on the Bank?”) can be found here. Part 2 (How Do Banks Invest Our Deposits?) can be found here.
What Dangers are Lurking Below the Surface?
The unrealized losses on the long-term reserves at SVB (the difference between the maturity value of the long-term bonds and the maturity value of those bonds) were a major problem when many customers decided to move their accounts to other banks and investment firms. To generate cash quickly for the withdrawals, the long-term bonds had to be sold. This triggered the unrealized losses. However, there are other problems.
Many of the mortgages owned by banks are at low fixed rates (roughly 3%) for 15 or 30 years, and the rate for new mortgages is now over 6%. In a period of high inflation, a low-rate fixed mortgage is a valuable asset for the homeowner. It is not for the bank. Some car loans are at risk if the U.S. goes into a recession.
A major risk involves commercial real estate loans made by the banks, and economists are sounding alarms. Several large cities have reported downtown office occupancy rates are currently less than 50%. The owners of the office buildings are not being paid rent for unoccupied offices, and there is serious concern that the owners will default on their commercial loans. On June 7, 2023, Treasury Secretary Janet Yellen said “I do think that there will be issues with respect to commercial real estate.” She added “I think banks are broadly preparing for some restructuring and difficulties going ahead.”
Goldman Sachs estimated that banks with less than $250 billion own approximately 80% of mortgages for commercial real estate. Jerome Powell, Federal Reserve Chairman, said on June 14, 2023 “There’s a substantial amount of commercial real estate in the banking system; a large part of it is in smaller banks.” Many of the risks are currently “unrealized,” but banks are facing headwinds from many directions.
As mentioned in Part 2 of this article, banks have access to rapid infusions of cash during emergencies like the “run on the bank” SVB experienced on Thursday and Friday, March 9-10. However, SVB executives ran into repeated snags and delays, and by Friday afternoon the FDIC stepped in and took over the bank. I suspect regulators are working to make sure the “safety-net” sources of cash will work more efficiently if more bank failures occur.