Banks accumulated $2.2 trillion in unrealized losses in the 12 months through March, and 10 percent had bigger unrealized losses in percentage terms than Silicon Valley Bank, scholars from the Stanford Graduate School of Business, University of Chicago Booth School of Business, Columbia Business School and Northwestern University Kellogg School of Management reported in March. (One of those scholars, Amit Seru of Stanford, told me Monday that because long-term interest rates have declined since March, the unrealized losses are probably closer to $1.6 trillion now.)
“Now we have mass insolvency thanks to Jay Powell,” Christopher Whalen, the chairman of Whalen Global Advisors, an investment banking firm, wrote in a weekend tweet. He tweeted last week that “it may take a few more bank failures” for the Fed to “admit fault and pirouette” from rate increases to rate cuts.
“Mass insolvency” is strong language. In reality, it’s not unusual for banks to go through periods when the market value of their loans and bonds is depressed. It doesn’t mean the banks are destined to fail. The banks that failed had the additional problem that they were highly reliant on uninsured deposits — amounts above the $250,000 per account that the F.D.I.C. guarantees.
The optimistic take is that JPMorgan Chase’s takeover of First Republic will help restore confidence in the banking system. The outflow of deposits from regional banks had already been slowing from its March rate, Dec Mullarkey, the managing director of investment strategy and asset allocation at SLC Management, told me on Monday. Mullarkey also said that new lenders, such as insurance companies, hedge funds and private equity funds, could at least partly fill the gap left by banks that are forced to retrench.
But the increase in interest rates remains a source of stress. Bankers like to say their deposits are “sticky” — that their depositors will stick with them because of inertia or loyalty or the exceptional service that the bank provides. But high interest rates are a solvent. Some banks are finding out that their sticky deposits aren’t sticking so well anymore. If a credit crunch forces banks to scale back lending, it will be a problem not just for them, but for the entire economy.
Outlook: Houze Song
The growth of China’s economy “could well” exceed the 5 percent target that the government set in March, according to an April 24 blog post by Houze Song, a fellow at the Paulson Institute’s MacroPolo think tank in Chicago. Employment has recovered rapidly, allowing Beijing to taper stimulus earlier than expected, “which means it has reserve fire power to stimulate in the third quarter if growth flags again,” he wrote.