If the experts are right, this might be the calm before a very wild storm.
Want a stat that should send chills done your spine? I’ve got one for you.
Half of America’s banks are insolvent right now.
The US crisis in it’s regional banking sector is rolling on. Last week all the speculation was around what might happen to PacWest and Western Alliance.
(Their CEOs were desperate to tell us that everything was fine, but markets didn’t believe them.)
And the US government wants us to believe that the collapse of Sillicon Valley Bank, Signature Bank and First Republic in the past two months (Fun fact: the second and third biggest banking collapses in American history have happened in the past few weeks) – the government wants us to believe that these were isolated instances.
They want us to believe that those collapses came down to an unlucky concentration in troubled industries, or on bad risk-management practices.
It’s not a systematic problem. The systems fine. Totally fine.
But things certainly do look a little shaky.
And then last week, A Hoover Institution report by Prof Seru and a group of banking experts calculates that more than 2315 US banks are currently sitting on assets worth less than their liabilities.
That is, almost half of America’s 4800 banks are already underwater.
The market value of their loan portfolios is $US2 trillion lower than the stated book value.
The only reason they’re still operating is because they haven’t had to mark those assets to market.
Either because they’re treasury bonds and they can label those bonds as ‘held to maturity’, thereby keeping the recent falls in bond values off their books.
Or because the assets are commercial real estate. Commercial real estate prices have only come off 5% so far, despite a huge lift in interest rates.
Capital Economics expects prices to fall another 15%.
Not only that, Goldman Sachs estimates that there’s $4-5 trillion dollars worth of commercial real estate debt that has to be refinanced in the next 18 months, at much higher rates.
That’s going to hurt borrowers, which in turn will hurt lenders.
And so when you factor all this in, you get the staggering realisation that half of the US banking system is already underwater.
It just doesn’t know it.
And we’re not just talking small regional lenders either. There’s some big names in the mix apparently. One of the 10 most vulnerable banks is a globally systemic entity with assets of over $US1 trillion!
So far, this is just a problem in theory. The rubber only hits the road if you have to sell your assets, as SVB did when it got caught in a run.
But as the ructions last week show, confidence is slipping in the regional banks.
And if more regional banks go, the problem starts to go up the ladder, and bigger and bigger banks start to fall over too.
And then you have a financial meltdown.
And nobody wants that.
But the only way out might be to cut rate and restore commercial property and treasury bond valuations.
But the Fed will be loathe to do that.
Talk about a rock and a hard place.