The US banking industry has finally begun to see a wave of failures, with four banks failing and going bankrupt one after another. What signal does this send?
Recently, the Federal Deposit Insurance Corporation of the United States suddenly announced the closure of First Republic Bank, the 14th largest bank in the United States, headquartered in Philadelphia.
I was really excited to see the news. Because this is a good thing, it means that the Fed's policy of continuing to maintain high interest rates without cutting interest rates has finally begun to be reversed. If the U.S. banking sector can't withstand it, then the Fed is not far from cutting interest rates. So the collapse of First Republic Bank could be really good for us.
First Republic Bank is the first bank in the United States to fail in 2024, and the fourth to close after the successive failures of Silicon Valley Bank, Signature, and First Republic. What signal does this send? Will there be more banks in the United States that will collapse in the future?
In my opinion, if the Fed continues to maintain high interest rates, there will inevitably be more and more thunderstorms in US banks, which is an inevitable result. Why?
First, the Fed's high interest rate policy is a major negative negative for the banking industry. As we all know, banks mainly rely on the scissors difference between deposits and loans to make profits. Good guys, now the Fed has launched a base risk-free rate of 5.25%. This means that the bank's deposit rate is inevitably unlikely to be lower than this rate. In particular, small and medium-sized banks with relatively small scale and relatively low credit level will inevitably offer higher interest rates to depositors in order to obtain more deposits. In this way, more depositors can be attracted to deposit.
The higher the interest rate, the higher the bank's cost of debt, and the more interest it needs to pay to depositors. If banks want to break even or be profitable, they must have a higher return on investment. At the same time, as the profitability of the 7 U.S. stock companies begins to slow down, it is very difficult to maintain sustained high growth in the context of excessive market capitalization. This means that the pressure on the asset investment side of Bank of America is very high. This is one of them.
Second, the value of bank assets has shrunk due to the decline in the value of commercial real estate. As we all know, mortgage lending on real estate has always been a traditional business of many banks in the United States. Due to the maturity and prosperity of the business environment in the United States, many banks have launched real estate mortgage services. In the context of low interest rates and a sustained and steady rise in property prices, this model is very profitable.
However, the drawbacks of this model become apparent in the context of higher and higher vacancy rates in commercial real estate due to high interest rates. Because the real estate mortgaged to the bank cannot be rented, the demand decreases and the price shrinks, which directly affects the financial status of the bank's assets. For example, the subprime mortgage crisis in the United States in 2008 was triggered by the collapse of real estate mortgages.
Therefore, on the one hand, the burden of high interest expenses is increasing, and on the other hand, the traditional commercial real estate mortgage business is difficult to operate, and the risk of a thunderstorm in some smaller-scale banks with weak resilience comes out.
Therefore, if the high interest rate policy of the United States continues, or even chooses to raise interest rates, then more and more American banks will repeat the mistakes of the past, thunderstorms, and even sound a series of explosions. Let's wait and see!