USA: “385 regional banks are at risk of bankruptcy”

By raising interest rates at the fastest pace in decades, the Fed has set the stage for a major crisis for regional banks, warns analyst Desmond Lachman, a senior fellow at the American Enterprise Institute, a former deputy director of the IMF and head of emerging markets strategy at Salomon Smith Barney.

385 regional banks may go bankrupt due to high interest rates. All this, combined with poor US financial performance, creates an explosive cocktail for an unprecedented financial crisis. In more detail, Lachman writes the following:

“There’s an old Wall Street joke about a man who jumped off the Empire State Building. When asked how he felt about reaching the 40th floor, he replied: “So far so good.” It’s worth wondering if something similar is happening in the American economy.The bad news is that by choosing to raise interest rates at the fastest pace in decades, the Fed risks setting the stage for another, even more vicious cycle of regional bank crises than the one we experienced early last year with the bank collapse “Silicon Valley”. If this happens, we will see regional banks sharply reduce lending to small and medium-sized businesses, which account for nearly half of economic activity and employment in the United States.”

The reason for pessimism about regional banks is twofold

First, the Fed’s aggressive policy on interest rates has led to very large losses in the portfolio of US Treasuries available for sale by banks. For the banking sector as a whole, these losses are estimated at approximately $600 billion.

Second, regional banks are unhealthily exposed to the depressed commercial real estate sector. This year, real estate companies will find it very difficult to refinance their $500 billion in outstanding loans because interest rates are still at levels well above what those loans were originally issued at. One reason is that since the pandemic, real estate companies have seen a record number of open offices and falling property prices.

A recent study by the National Bureau of Economic Research reports that the problems of regional banks are severe. According to the study, if interest rates remain at current levels and commercial real estate companies begin defaulting on loans, about 385 regional banks could fail. This, in turn, will raise the specter of the savings and loan crisis of the 1980s.

Fiscal problems

“An even more serious cause for concern is the dismal state of US government finances. During periods of economic growth, the US government must have a budget surplus. However, the budget deficit is more than 6% of GDP and is expected to remain at this level for a long time, as far as one can judge.

It is unlikely that a divided Congress will resolve the issue any time soon. That’s why the Congressional Budget Office is warning that by 2030, the national debt as a share of the economy could reach levels similar to those recorded at the end of World War II.

What if Asians stop buying US Treasuries? One thing to worry about is that major foreign countries such as China and Japan are losing interest in buying US Treasuries. Also worrying is that rating agencies are warning of a downgrade in the US’s credit rating if they don’t eliminate the deficit. A downgrade of the US could lead to a dollar crisis in the long term, which could lead to a new period of inflation.”

Source link