Source: Wall Street News
Author: Ge Jiaming

A finance professor at Stanford University's business school cried out that thousands of US banks may be “insolvent”. Half of the 4,800 banks in the US are in danger, and the crisis is raging like a tsunami.

Professor Amit Seru recently wrote for the New York Times entitled “Yes, you should be concerned about potential banking crises for the following reasons”The column notes that the recent fragility and successive failures of several well-known banks are not isolated incidents.

With interest rates rising rapidly, major changes in people's work patterns, and the imminent triple 'combo punch' of economic recession, there will be a credit crunch that has occurred since the 2008 financial crisis.

Seru believes that weak confidence in the market has made the US banking crisis worse, and high interest rates have further increased the risk of banks defaulting. The crisis is not an isolated case:

This is terrifying; thousands of banks will be “insolvent.” We can't think that the crisis is only about the Bank of Silicon Valley and First Republic Bank.

Panic spreads and confidence is difficult to regain

Seru believes that it is too early to say that the US banking crisis has subsided, that market panic is still spreading, and that a larger credit crisis than 2008 may be imminent:

Over the past few months,$SVB Financial (SIVBQ.US)$,$Signature Bank (SBNY.US)$with$First Republic Bank (FRCB.US)$They all went bankrupt; their total assets already exceeded the total assets of the 25 banks that went bankrupt during the financial crisis.

Bank stocks experienced a massive sell-off this week after J.P. Morgan announced the acquisition of all of First Republic Bank's deposits and “almost all” assets on May 1. On Thursday, May 4th,$PacWest Bancorp (PACW.US)$with$Western Alliance Bancorp (WAL.US)$The sharp drop in stock prices all tells the market that a crisis of confidence is still spreading in the banking industry, and the turmoil continues.

The current poor macroeconomic environment has seriously weakened the ability of many banks to withstand another credit crisis, and it is clear that a large-scale credit crisis may be quietly looming.

Wall Street reports that the US banking industry is facing a negative feedback loop due to a lack of confidence:Appearing in negative news caused stock prices to fall, sparking more media news and discussions, which in turn triggered a rush for savers.

Take First Republic Bank as an example. On Monday, April 24, First Republic Bank stated that its total deposits were 102.7 billion US dollars, down only 3.7% from the previous year; however, by April 28, its deposits had dropped to 92.6 billion US dollars. In just one week, the bank lost $10 billion in deposits, accounting for about 10% of its total deposits.

Buffett also bluntly stated at this year's Berkshire Hathaway shareholders' annual meeting that “panic” is a long-standing problem that has plagued the banking industry. “Panic is infectious and has always been.” But he also pointed out that in the past, if you saw people queuing up at a bank, the normal reaction was to join the queue. And this year,Although the regulator FDIC allows every depositor to get all of their deposits, the public is worried.

Seru pointed out that what brought banks into the storm was the Federal Reserve's interest rate hike 10 times in a row. Currently,The current market value of Bank of America's assets is $2 trillion lower than its face value. Small and medium-sized banks that focus on long-term asset investment are more likely to fall into the “insolvent” dilemma:

There is a basic principle in banking: the longer the investment period, the more susceptible it is to changes in interest rates. When interest rates rise, the value of assets held by banks to generate a return on investment falls.

As a result, rising interest rates may drain banks' capital and make them insolvent. When I looked at about 4,800 banks across the US, I found that the decline in share capital value of small and medium-sized banks was the most obvious, reflecting their greater emphasis on long-term asset bets.

In an interview with The Guardian, Seru more accurately pointed out this worrying figure --Of the 4,800 banks in the US, nearly half are “in jeopardy”.

The commercial real estate storm is imminent

Notably, Seru also issued a warning about the storm in the US commercial real estate market. Higher interest rates would greatly increase the risk of Bank of America default:

Due to the transmission of tight monetary policy to the lagging nature of the real economy, I think that in the next few quarters, major US banks will face the most serious challenges so far, and the risk of default will rise dramatically. For example, during the Great Depression, as interest rates rose, the default rate rose from 1% to around 9%.

The total value of commercial real estate loans (CRE) in the US is about $2.7 trillion, accounting for about a quarter of the average bank's assets. A large number of these loans will expire in the next few years, and if higher interest rates are needed to refinance them, the risk of loan defaults will increase.

Wall Street News has mentioned many times in previous articles that commercial real estate in the US may be the next industry to thunderstorm after the banking crisis:

There are also about 400 billion US dollars of commercial real estate (CRE) debt due this year, nearly trillion US dollars of debt due in the next two years, and the possibility that small banks will follow big banks to tighten their loan exposure, all increasing the pressure on commercial real estate. Meanwhile, the vacancy rate of office buildings has further increased, heightening market concerns about the US commercial real estate storm.

For tax reasons, Berkshire has not been very active in the commercial real estate sector. When talking about non-performing asset loans at this shareholders' meeting, Munger said, “In the US and other parts of the world, downtown,The hollowing out will be very serious and very unsettling.”

Wall Street News mentioned earlier this week that Munger recently warned that a storm is brewing in the US commercial real estate market. As real estate prices fall, the US banking industry is “flooded with non-performing loans.” Munger believes that Berkshire's restraint is partly due to the risks that may be brought about by large commercial real estate loans from banks. He said:

“A lot of real estate is not doing well anymore. We have lots of troubled office buildings, lots of struggling shopping malls, and lots of other real estate in trouble. There's a lot of sorrow outside.”

In an interview with the media last month, Buffett said that the wave of Bank of America bankruptcies is not over. More banks may go out of business in the future, but depositors of bank deposits will not suffer losses.

Editor/Somer