In 2009, 140 banks went bankruptand a recent report from financial consultancy Klaros Group indicates that hundreds of banks are in danger to go bankrupt this year. This is being presented primarily as a danger to individuals and communities rather than the economy as a whole, but for struggling lenders across America, a series of small bank failures could very quickly turn into a bath greater bloodshed – especially in an economy marked by high inflation and feverish dependency. at extremely low interest rates.
The data source: FDIC.gov
The companies most at risk are small banks representing assets less than 10 billion dollars, with a handful of larger regional companies. Some may be able to avoid closure by halting expansion plans or offering fewer services. Others could save themselves by merging with larger banks. But with inflation too high for the Fed to cut now, “higher and longer“Interest rate policy appears increasingly likely, and banks with heavy exposure to distressed commercial real estate are at particular risk of triggering a domino effect of small collapses that would lead to larger collapses and turn into a real estate crisis.
The Klaros report examined troubled community banks with a large proportion of distressed commercial real estate loans, uninsured deposits and massive losses on other loans and bonds. These banks are being held hostage by the policy of raising interest rates, and Jerome Powell has already recognized that not all of the Fed's hostages will succeed. Fear not though — as he said in a recent hearing on monetary policy In the Senate Banking, Housing and Urban Affairs Committee, a few failures will not turn into an uncontrolled downward spiral:
“There will be bank failures…I think it’s manageable, is the word I would use.”
In other words, banks will fail, but that won't be enough to trigger a major banking crisis or crash the economy. broader commercial real estate sector. Powell says the Fed is “working” with these small, struggling banks that are sitting on loans for empty office and retail buildings, but it's up to you whether you find his words reassuring:
“There are empty buildings in many cities big and small…thousands and thousands of people who worked in these buildings are also under pressure…we are just trying to stay ahead, bank by bank .”
But interpreting the Fed's doublespeak is always a tricky business. After all, if he did think 2024-2025 bank failures would be enough to trigger a domino effect, he wouldn't say it, or it would cause markets to panic, and the collapse could quickly become a self-fulfilling prophecy.
But don't worry: Powell promises that, in any case, the Fed will use taxpayer money to protect megabanks deemed “systemically important” if its economic interference leads to a banking crisis. The first bank failure of 2024, First Republic Bank, does not fall into this “too big to fail” category and has been absorbed by the largest banks. Fulton Financial. Nearly 50% of the First Republic's loans were for commercial real estate.
In all his pride, the Fed is stuck between preventing a banking crisis and preventing inflation from getting even more out of control. Higher rates are needed to reduce inflation, but crucial sectors of the economy that rely heavily on loans cannot survive in a higher rate environment, even if they don't seem insolvent at first glance.
In a free market, interest rates would be much higher – and “too big to fail” banks would not exist. Parts of the economy that could not support higher rates would be eliminated from the system. Without the ruthless but self-regulating mechanisms of the free market, where losers are allowed to lose no matter how small, the magic of the Federal Reserve locks America in a seemingly endless cycle of death and reincarnation. Recession and bubble, expansion and recession. But each cycle tightens the spring as the Fed kicks forward to prevent a total system failureand the dollar itself, in the longer term.
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