The recent failures of three major U.S. banks have people predicting more bank collapses following the Federal Reserve’s increase of the benchmark interest rate by 25 basis points. Charles Gasparino, an American journalist, stated that Wall Street’s “low-rate” junkies are ignoring the banking crisis. Quill Intelligence CEO, Danielle DiMartino Booth, predicts that the banking industry is facing problems that “nobody wants to call a banking crisis.”
There have been a multitude of opinions and statements from financial experts and officials since the recent failures of three major U.S. banks. On Friday, all four major benchmark stock indexes ended in positive territory after the Federal Reserve raised the federal funds rate by 25 basis points two days earlier.
Charles Gasparino, a journalist, radio host, and financial commentator, wrote an opinion editorial that argues the “modern-day stock market is an addict.” According to Gasparino, higher rates are “painfully exposing” a “rot inside the banking system.” Commercial bankers took “wild gambles,” and the recent failures of Silicon Valley Bank and Signature Bank underscore the issue. “There will be others, as many as two dozen, I am told,” Gasparino wrote. “All have balance sheets remarkably similar to SVB and Signature. If things continue to go south, they are ready to fold, too, guaranteeing a steep recession.” Coincidentally, researchers at New York University published a paper on March 13 showing that U.S. banks had unrealized losses of $1.7 trillion in Dec. 2022.
Gasparino also mentions First Republic Bank, which he insists made some of the same horrible portfolio choices as SVB. He doesn’t believe people should “trust the addicts trading stocks.” Gasparino compares the recent stock market rally on Thursday and Friday to the “stupefied giddiness of a junkie who just got his fix whenever he hears lower rates are in the offing.” While traders may be hoping for lower rates, Fed chair Jerome Powell recently emphasized that “rate cuts are not in our base case,” and he insisted that “inflation remains too high.”
Danielle DiMartino Booth, the author and CEO of Quill Intelligence, predicts more bank failures to come as well. She discussed the subject with Kitco News lead anchor Michelle Makori and mentioned the issues surrounding First Republic Bank. Booth noted that “we have not seen the biggest banks step up,” and many of these troubled banks are “sitting in no man’s land.” Furthermore, Booth claims that a precedent has been set after the Federal Reserve, Treasury, and Federal Deposit Insurance Corporation (FDIC) bailed out SVB and Signature.
“The precedent has been set, and it cannot be unset,” Booth told Makori. “As regulators, it’s not your job to pick winners and losers, but that’s the corner the [U.S. government] backed themselves into when they backed all of the uninsured deposits of Signature and SVB. We’re in the middle of a banking crisis that nobody wants to call a banking crisis,” Booth concluded.
The banking industry is facing profound difficulties as banks reckon with the new, higher benchmark interest rate. These banks’ troubles are complicated by the fact that they are heavily engaged in lending to industries mired in other struggles related to the Covid-19 pandemic, among other sources of instability.
In a recent article published by the Motley Fool, one expert notes that several banks are seeing high “non-performing assets,” or loans that are at risk of going unpaid. He also points out that it’s challenging for bankers to determine just how insurmountable these issues are since businesses’ fortunes have rapidly shifted with the pandemic’s ups and downs.
Furthermore, banks are struggling with low profitability due to the interest rate environment, which makes it hard to make money on loans, on which banks rely for profits. Some experts say that smaller, community-based banks are more susceptible to failure in the changing rate environment since they are more reliant on these margins.
Many experts believe that the banks may have a rocky transition as we move into a longer-term trend of rising rates. The coronavirus and policy responses to the pandemic create many uncertainties, and so it is challenging to predict precisely what effects these changes will have on the banking industry.
Overall, it is evident that the banking industry is facing massive challenges that do not seem to be going away anytime soon. Banks face a combination of low profitability, rising non-performing assets, and a general sense of instability and uncertainty caused by the pandemic. Many experts predict more bank failures to come, but it is difficult to assess the scale of the current crisis, which is why the consensus seems to be that we are “in the middle of a banking crisis that nobody wants to call a banking crisis.”
