In the weeks following the Silicon Valley Bank (SVB) collapse, around $1 trillion in deposits has been withdrawn from banks in the United States, according to research by JPMorgan Chase. This lack of deposits combined with high interest rates may create more risks and uncertainty for the banking system despite a pause in banking closures.
Some banking deposits are still vulnerable to risk.
In 2020 and 2021, U.S. households accumulated $2.3 trillion in what the Federal Reserve calls “excess savings.” Businesses also began storing large amounts of capital at banks. According to The Wall Street Journal, uninsured deposits at the end of 2022 totaled $8 trillion.
In a research note published March 2023, JPMorgan Chase’s global market strategy team said, “The uncertainty generated by deposit movements could cause banks to become more cautious on lending. This risk is heightened by the fact that mid- and small-size banks play a disproportionally large role in U.S. bank lending.”
Commercial real estate loans could become another risk factor for financial institutions.
According to Federal Deposit Insurance Corporation (FDIC) data, unrealized losses on commercial real estate debt securities climbed to $43 billion by the end of 2022.
Meanwhile, approximately $900 billion in commercial real estate loans will mature in 2024. This comes at a time when many businesses are being slow to move back into offices, leaving much real estate empty and unrented and making revenue difficult to accrue. The quality of commercial real estate bonds may depreciate from AAA to BBB as interest rates rise and commercial real estate lending becomes riskier.
These risks may ultimately create problems for banks.
A paper published by economists from the University of Southern California, Northwestern University, Columbia University, and Stanford University found that nearly 200 banks could be at risk of closure from a rush of depositors withdrawing their money.
Even as the fallout from SVB’s collapse winds down, the banking system may still be at risk.
Read U.S. Money Reserve’s “Market Insider” each week for more economic insights. Nothing herein should be considered as portfolio or retirement advice as U.S. Money Reserve (“USMR”) cannot and does not offer financial advice. Clients should consult a financial advisor for specific advice. This commentary is provided by USMR for informational purposes only and is provided on an “as is” basis without any warranty of any kind, whether express or implied. Your use of the information provided in this commentary is entirely at your own risk. In no event will USMR be held liable for any indirect, special, incidental, or consequential damages arising from the use of information contained in this commentary.
