Any guess as to how much of an interest rate hike it would take to cause a severe banking crisis? For example, a quarter-point increase this year could be weathered, but anything greater would be disastrous?
There are three trends emerging that lead towards a crisis within banking:
1 - Deposits are leaving banks at an increasing rate, a trend which started shortly after the Fed began pushing up the federal funds rate specifically, and market rates by extension.
2 - The value of a variety of securities, including commercial mortgage backed securities and treasuries, which are held on bank balance sheets is declining. As yields have moved up, the value of existing securities portfolios has moved down. This is inevitable given the lower yields for the assets on bank balance sheets (which in a period of rising interest rates is mathematically unavoidable, as the assets banks hold will always have historical yields rather than current yields).
3 - Commercial real estate loans are finding increasing difficulty in refinancing. Not only has the aftermath of government lunatic lockdowns shredded the valuations of most commercial real estate portfolios, but rising interest rates make the cost of refinancing greater. As interest rates rise, more and more commercial borrowers will not be able to afford refinancing. Again, this is mathematically unavoidable (always remember that interest rates are first and foremost the "price" of money/credit).
If we look at the market valuations for REITs and the imputed market valuation for CMBS products (using the CMBS iShare ETF as a bellwether), we see that both began recovering value last November--which is about the time market interest rates began declining despite the Fed's rate hikes. That trend was aborted during the kerfuffle over Silicon Valley Bank and the deathwatch that was imposed on First Republic Bank, but it appears to be reasserting itself recently.
Thus, any rise in market interest rates is likely to reverse these appreciation trends. The real question then becomes how responsive will market rates be to the upward pressure of additional increases to the federal funds rate. Going by the most recent rate hikes, the answer arguably could be "not very", in which case a much larger fed funds rate hike would be needed to reverse the appreciation trends.
This, of course, is a catch-22 for the Fed. If the markets are truly nonplussed by future increases in the federal funds rate, the Fed's rate hike strategy is effectively dead in the water. If the markets are truly moved by future increases in the federal funds rate, the Fed's rate hike strategy will unavoidably exacerbate rates of commercial loan delinquency, which will damage bank balance sheets and demand additional capital infusions, while also continuing to incent deposit flight, which will mathematically lead to a liquidity crisis as banks are pushed to sell underwater portfolios of securities in order to satisfy exiting depositors demands for their money.
That is the key to answering your question: it's not the Fed's rate hike per se that will trigger the banking crisis. It's what market interests do around the Fed's rate hike. The lower market rates move, the less severe the liquidity and loan default crises will be. The higher market rates move, the worse those crises will be.
Catch-22 indeed! I could see commercial real estate - especially the downtowns - stuck in a devaluation spiral until we’re in another Great Depression, with all the accompanying financial quagmires. Ultimately, this could result in the ‘woke’ city and state government officials losing influence to a more business-and-safety oriented leadership, and that’s about the only silver lining I can here.
Meanwhile, back at the fed . . . https://fortune.com/2023/04/14/will-fed-hike-interest-rates-inflation-christopher-waller
In those same remarks, Waller said core inflation has gone "sideways" since December 2021.
In other words, he's acknowledging that hiking interest rates since March of 2022 has had ZERO effect.
To the bureaucratic matrix, reality-based data is considered a dangerous virus. It is not permitted to intrude.
And yet folks call those within the bureaucratic matrix "experts".
Be afraid. Be very afraid.
Any guess as to how much of an interest rate hike it would take to cause a severe banking crisis? For example, a quarter-point increase this year could be weathered, but anything greater would be disastrous?
There are three trends emerging that lead towards a crisis within banking:
1 - Deposits are leaving banks at an increasing rate, a trend which started shortly after the Fed began pushing up the federal funds rate specifically, and market rates by extension.
2 - The value of a variety of securities, including commercial mortgage backed securities and treasuries, which are held on bank balance sheets is declining. As yields have moved up, the value of existing securities portfolios has moved down. This is inevitable given the lower yields for the assets on bank balance sheets (which in a period of rising interest rates is mathematically unavoidable, as the assets banks hold will always have historical yields rather than current yields).
3 - Commercial real estate loans are finding increasing difficulty in refinancing. Not only has the aftermath of government lunatic lockdowns shredded the valuations of most commercial real estate portfolios, but rising interest rates make the cost of refinancing greater. As interest rates rise, more and more commercial borrowers will not be able to afford refinancing. Again, this is mathematically unavoidable (always remember that interest rates are first and foremost the "price" of money/credit).
If we look at the market valuations for REITs and the imputed market valuation for CMBS products (using the CMBS iShare ETF as a bellwether), we see that both began recovering value last November--which is about the time market interest rates began declining despite the Fed's rate hikes. That trend was aborted during the kerfuffle over Silicon Valley Bank and the deathwatch that was imposed on First Republic Bank, but it appears to be reasserting itself recently.
Thus, any rise in market interest rates is likely to reverse these appreciation trends. The real question then becomes how responsive will market rates be to the upward pressure of additional increases to the federal funds rate. Going by the most recent rate hikes, the answer arguably could be "not very", in which case a much larger fed funds rate hike would be needed to reverse the appreciation trends.
This, of course, is a catch-22 for the Fed. If the markets are truly nonplussed by future increases in the federal funds rate, the Fed's rate hike strategy is effectively dead in the water. If the markets are truly moved by future increases in the federal funds rate, the Fed's rate hike strategy will unavoidably exacerbate rates of commercial loan delinquency, which will damage bank balance sheets and demand additional capital infusions, while also continuing to incent deposit flight, which will mathematically lead to a liquidity crisis as banks are pushed to sell underwater portfolios of securities in order to satisfy exiting depositors demands for their money.
That is the key to answering your question: it's not the Fed's rate hike per se that will trigger the banking crisis. It's what market interests do around the Fed's rate hike. The lower market rates move, the less severe the liquidity and loan default crises will be. The higher market rates move, the worse those crises will be.
Catch-22 indeed! I could see commercial real estate - especially the downtowns - stuck in a devaluation spiral until we’re in another Great Depression, with all the accompanying financial quagmires. Ultimately, this could result in the ‘woke’ city and state government officials losing influence to a more business-and-safety oriented leadership, and that’s about the only silver lining I can here.