After the banking turmoil in 2023, in which we witnessed some of the largest banking failures in our nation’s history, I have kept a close eye on our banking system and the factors that may lead to additional volatility. While the waters have calmed somewhat, there are still events on the horizon that could mean trouble for banks in 2024.
Banks are still feeling the effects of last year’s panic.
Three of the five largest U.S. bank failures in history took place in 2023, starting with the closure of Silicon Valley Bank in March. As a result of these failures, consumer confidence in banks plummeted, and deposits fell to 39-year lows, according to the FDIC.
The effects of this crisis include a drop in banking stocks, as well as a widespread reduction of the banking workforce. Citigroup, Bank of America, and Wells Fargo collectively cut 17,700 jobs in 2023, according to a January 12, 2024, report by Reuters. Citigroup also announced plans to cut 20,000 jobs over the next two years.
The government program created to help banks is coming to an end.
In response to the turmoil banks went through in 2023, the Federal Reserve introduced the Bank Term Funding Program. This program was created to protect banks from the massive outflow of deposits that followed the drop of consumer faith in our banking system.
On January 9, 2024, Federal Reserve vice chair Michael Barr said the program will not be extended and will expire on March 11, 2024. One explanation for this is that banks may not be facing as much adversity in 2024. However, that explanation can easily be challenged by the trouble brewing in the commercial real estate market.
Commercial real estate issues may create new hurdles for banks in 2024.
Longtime readers of “Gold News & Views” know that I’ve written about this issue before, but for new readers, here’s a quick summary of the factors that may impact the commercial real estate market in 2024: As more people have shifted to working from home over the past few years, less commercial real estate is being utilized, rented, or sold. This could lead to billions of dollars in commercial real estate loans coming to maturity on properties that are generating little if any income, and defaults on a massive scale.
A report issued by the Financial Stability Oversight Council on December 14, 2023, names commercial real estate as the number one financial risk to the U.S. economy. And a paper from researchers at USC, Columbia, Stanford, and Northwestern titled “Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility” estimates that the commercial real estate market is at risk for a $160 billion loss—its largest since 2008.
Knowing these risks are being faced by a banking sector that has already shown itself to be susceptible to runs on their deposits, I see this as a major potential factor that could increase market volatility in 2024 and increase the demand for safe-haven assets like gold. In 2023, we saw how concerns over the banking industry pushed gold prices upward. If we see a commercial real estate crisis in the next few years, gold may continue to reach new all-time highs.