Source: CITIC Securities Research
Judging from data from banks across the US, both the asset side and the debt side of the US banking industry are under heavy pressure. It is expected that the continuing deposit loss problem will further increase banks' operating pressure and liquidity pressure. At the same time, commercial real estate loans held by banks have a high risk exposure, and it is a common problem that losses from unrealized securities investments are high.
However, considering that the development of the US financial market after the 2008 financial crisis was relatively healthy and that regulators were more experienced in dealing with it, the probability of systemic risk occurring in the US banking industry in this round is low. However, widespread pressure from the banking industry may push credit tightening faster, and the labor market may weaken rapidly in the future. Therefore, it is expected that there is a possibility that the Federal Reserve will cut interest rates within the year.
Debt side: The trend of serious deposit losses is difficult to stop, and liquidity pressure in the US banking industry continues to increase.
Gallup polls show that savers are very concerned about deposit safety, and small to medium banks faced serious deposit loss problems after the Silicon Valley banking crisis. Furthermore, it is important to note that this round of crisis is far faster than during the previous crisis period. If a risk event occurs, banks will face greater liquidity shock challenges. Although banks can make up for lost deposits through collateral loans and the use of monetary policy tools, this will squeeze banks' profit margins. Considering that it is more difficult for the Federal Reserve to cut interest rates in the short term, it is expected that the deposit loss problem will continue to increase liquidity pressure in the US banking industry. Furthermore, judging from data from banks across the US, as of 202Q4, there are banks with assets greater than 50 billion US dollars that actually account for more than 90% of the amount of unprotected deposits, and there are also some larger banks that account for more than 75% of uninsured deposits, such as Citigroup. Moreover, the FDIC's ability to protect US deposits is essentially limited.
Under strict supervision, large banks have sufficient liquidity reserves, and many small to medium banks have low reserve levels. Attention should be paid to the vulnerability of small and medium-sized banks in the US to liquidity shocks.
Judging from the national banking industry data, as of the fourth quarter of 2022, the ratio of major reserve reserves to deposits in the US banking industry was at a low level. The ratio distribution of small banks and small banks with total assets of less than 50 billion US dollars was clearly skewed to the right, and many banks had lower levels of this indicator. However, the share of high-quality liquid assets held by banks in total assets declined rapidly in 2022. This indicator for non-globally systemically important and non-large banks was close to pre-pandemic levels.
Real estate loans have a high risk of loss. Unrealized profits and losses from securities investments are generally high, and there are hidden liquidity risks.
On the one hand, the value of commercial real estate has shrunk drastically since 2022, commercial real estate is facing great downward pressure, and commercial real estate loans have a high risk of loss. On the other hand, the phenomenon of unrealized losses from bank securities investment drastically eroding banks' common stock Tier 1 capital is widespread. Non-leading banks have unrealized losses on a larger scale, while the deposit-to-loan ratio of small banks is higher, and the risk of crowding is higher. In the future, small bank securities will not achieve profit or loss or cause higher liquidity pressure.
The previous financial deregulation created hidden dangers.
The 2018 “Promoting Economic Growth, Relaxation of Regulatory Requirements, and Protection of Consumer Rights Act” relaxes financial industry supervision and raises the lower threshold for determining the total assets of systemically important banks. We believe it has laid a hidden danger for the recent banking crisis. At the same time, the policy of subsequent deregulation allows small and medium-sized banks to choose not to include AOCI in CET1 capital (unrealized profit and loss of financial assets that can be sold is an important part of AOCI), and there is a possibility that the bank's capital adequacy ratio will be overestimated.
However, taking history as a guide, the probability that this round of US banking will cause systemic risk is low.
Currently, the risk of default on home mortgages for US residents is low, and MBS held by financial institutions is more secure. At the same time, after the 2008 financial crisis, the US financial market developed healthily. The government, monetary authorities, and regulators had more full experience in dealing with the crisis, bailouts were more targeted, and the policy toolbox was adequate. Although the asset side and debt side of the banking industry are generally under pressure, the US banking industry is highly concentrated, and the regulatory standards for large banks are strict, and their resistance to liquidity shocks is sufficient. Therefore, the probability that this round will eventually trigger systemic financial risk is low, but it is still necessary to pay attention to banks' risk exposure to commercial real estate.
There is a possibility that the Federal Reserve will cut interest rates during the year.
In the context of loss of deposits, the ability to derive deposits has weakened, and the future tightening of US credit is worrying. It is expected that its negative impact on the economy will gradually become apparent. It is expected that the pressure on the US banking industry will continue, and there is a high probability that the Federal Reserve will not raise interest rates in June and beyond. The credit crunch may have led to a rapid weakening of the labor market. The three-month average number of new non-farm workers may fall to around 100,000 in the fourth quarter of this year. Therefore, there is a possibility that the Fed will cut interest rates within the year. The timing of interest rate cuts may be in the fourth quarter of this year or the first quarter of next year.
Risk Factors:
The fragility or liquidity risk of the US financial system exceeds expectations; US inflation exceeds expectations; US monetary policy exceeds expectations; geopolitical risks exceed expectations, etc.
Editor/Somer