14 votes

Half of America’s banks are potentially insolvent – this is how a credit crunch begins

Posted by AugustusFerdinand
Tags: banking, banks, insolvency, real estate.commercial, financial crisis, credit crunches, usa, author.ambrose evans pritchard, source.the telegraph, paywall.hard
https://www.telegraph.co.uk/business/2023/05/02/half-of-americas-banks-are-already-insolvent-credit-crunch/

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Authors
Ambrose Evans-Pritchard, Jeremy Warner, By Chris Price, By James Titcomb, By Simon Foy, Kallum Pickering
Published
May 2 2023
Word count
388 words

8 comments

  1. [5]
    AugustusFerdinand
    Link
    Paywall bypassable with 12ft.

    he twin crashes in US commercial real estate and the US bond market have collided with $9 trillion uninsured deposits in the American banking system. Such deposits can vanish in an afternoon in the cyber age.

    The second and third biggest bank failures in US history have followed in quick succession. The US Treasury and Federal Reserve would like us to believe that they are “idiosyncratic”. That is a dangerous evasion.

    Almost half of America’s 4,800 banks are already burning through their capital buffers. They may not have to mark all losses to market under US accounting rules but that does not make them solvent. Somebody will take those losses.

    “It’s spooky. Thousands of banks are underwater,” said Professor Amit Seru, a banking expert at Stanford University. “Let’s not pretend that this is just about Silicon Valley Bank and First Republic. A lot of the US banking system is potentially insolvent.”

    The full shock of monetary tightening by the Fed has yet to hit. A great edifice of debt faces a refinancing cliff-edge over the next six quarters. Only then will we learn whether the US financial system can safely deflate the excess leverage induced by extreme monetary stimulus during the pandemic.

    A Hoover Institution report by Prof Seru and a group of banking experts calculates that more than 2,315 US banks are currently sitting on assets worth less than their liabilities. The market value of their loan portfolios is $2 trillion lower than the stated book value.

    These lenders include big beasts. One of the 10 most vulnerable banks is a globally systemic entity with assets of over $1 trillion. Three others are large banks. “It is not just a problem for banks under $250bn that didn’t have to pass stress tests,” he said.

    Paywall bypassable with 12ft.

    5 votes
    1. [4]
      skybrian
      Link Parent
      I haven’t seen any sign of this, but I’m wondering if the Fed might worry enough to lower interest rates to avoid a financial crisis? That would reduce banks’ borrowing costs and make their...

      I haven’t seen any sign of this, but I’m wondering if the Fed might worry enough to lower interest rates to avoid a financial crisis? That would reduce banks’ borrowing costs and make their long-term financial assets (such as bonds) worth more again.

      Or at least stop raising them. The newspapers predict one last increase.

      3 votes
      1. [3]
        onyxleopard
        Link Parent
        Wouldn’t that mean we just have a different flavored financial crisis with runaway inflation? The whole reason the Fed has been pulling their chosen lever of tweaking the interest rate was to...

        I haven’t seen any sign of this, but I’m wondering if the Fed might worry enough to lower interest rates to avoid a financial crisis?

        Wouldn’t that mean we just have a different flavored financial crisis with runaway inflation? The whole reason the Fed has been pulling their chosen lever of tweaking the interest rate was to lower inflation, right? If not continue the rate hikes, how do they manage that crisis?

        The newspapers predict one last increase.

        Hasn’t the Fed said that they’ll continue adjusting interest rates, based on the economic conditions as they unfold, until they hit their target of 2% inflation? Aren’t the newspapers just listening to what the Fed has been saying here? Wouldn’t it be incredibly irresponsible for the Fed to keep repeating their refrain about their target goal and how they plan to reach it, and then reverse course?

        This is basically a trolley problem for the Fed, with banks on one track and everyone else on the other, no? Is there another track and another lever that nobody is talking about?

        3 votes
        1. [2]
          skybrian
          Link Parent
          Yes, the newspapers are reporting what the Fed has said they’ll do. I’m wondering what it would take for them to change their plans. It’s unclear whether inflation is still a problem. In March the...

          Yes, the newspapers are reporting what the Fed has said they’ll do. I’m wondering what it would take for them to change their plans.

          It’s unclear whether inflation is still a problem. In March the CPI increase was only 0.1% (seasonally adjusted), compared to 5% for the previous 12 months. (It takes time for people to get used to new prices after the inflation that already happened, though.)

          So, it’s not clear that there’s any dilemma. Pausing on fighting inflation is what they said they’d do anyway.

          They always have to say that they’ll fight inflation if it comes back. But pausing or lowering interest rates a little would give banks time to adjust. Old loans made at low interest rates are constantly being replaced with new loans made at higher interest rates.

          Probably, the plan won’t change much because the Fed likes to be predictable and changing the plan might alarm people. Sometimes they do unexpected things, though.

          2 votes
  2. [2]
    Atvelonis
    Link
    I'm not qualified to speak about economics, but it's never made sense to me that banks are legally permitted such a low reserve requirement when lending. I realize that this limit being variable...

    I'm not qualified to speak about economics, but it's never made sense to me that banks are legally permitted such a low reserve requirement when lending. I realize that this limit being variable can give regulators finer control over monetary policy, but I see little value in operating a banking system that repeatedly collapses over liquidity deficits. FDIC insurance is nice and all, but it would be better if financial institutions weren't encouraged to put themselves into a position of insolvency in the first place.

    4 votes
    1. skybrian
      Link Parent
      I don’t know, but I think in part it’s because banks lending out money is considered important? I’ve read about people who wanted to start a “narrow bank” that takes deposits and parks them with...

      I don’t know, but I think in part it’s because banks lending out money is considered important?

      I’ve read about people who wanted to start a “narrow bank” that takes deposits and parks them with the Federal Reserve, without making any loans at all, but they haven’t been able to get permission to do it.

      But it’s not clear to me that bank deposits and loans need to be connected. People could use narrow banks to make deposits, and separately, the central bank could loan money to lending banks that just make loans, and this seems equivalent to the Fed guaranteeing the deposits, but more robust. If the Fed doesn’t like what a lending bank is doing then it could revoke permission to make loans.

      3 votes
  3. EgoEimi
    Link
    I'm not particularly knowledgeable about the banking sector. I do have an uneasy feeling that significant swaths of the US economy are just house of cards built on cheap capital, and rising...

    I'm not particularly knowledgeable about the banking sector. I do have an uneasy feeling that significant swaths of the US economy are just house of cards built on cheap capital, and rising interest rates will reveal that a lot is actually less productive than once thought.

    3 votes