People are once again pulling their money out of the US banking system.
The latest data from the Federal Reserve Economic Data (FRED) system shows total deposits in all commercial banks fell $133.163 billion in seven days, from $17.580 trillion on April 10th to $17.446 trillion on April 17th.
The new numbers have erased gains that banks made at the start of this year, and total deposits remain below the industry’s all-time high of $18.205 trillion, which was reached right before last year’s banking crisis began.
Amid the backdrop of another bank failure last week, the industry at large continues to battle high interest rates from the Fed, unrealized losses on US bonds, competition from money market funds and concern about exposure to commercial real estate.
Former Kansas Fed president Thomas Hoenig warns in a new interview with David Lin that 722 US banks are still at risk of failure due to massive unrealized losses.
Explains Hoening,
“I think [the banks are] very vulnerable to the fact that we still have interest rates that are much higher than they were when a lot of these loans were made, when the policy rate, the Fed funds rate was close to zero. Now it’s almost 5.5%. Those conditions of higher rates have not changed.
When they say the unrealized losses, it’s across the loan and investment portfolio.
Those regional banks that failed last year were really involved with losses in their credit risk-free, government and government-guaranteed assets. They were taking these very huge reductions in the value of those assets in terms of real value. But they did not have to mark them down because they were so-called ‘hold to maturity’ assets or as available for sale for certain banks did not have to be written down at one time.
Once you sell any part of that, you have to write the whole portfolio down, and that’s why there are potential losses.”
In December, the Federal Deposit Insurance Corporation (FDIC) reported that US banks were holding $684 billion in unrealized losses.
And Hoening says lenders are now at greater risk of realizing those losses with borrowers increasingly failing to make payments amid a high interest rate environment.
“You see that in the call reports of banks – the income and call reports of banks across the nation. You see non-performing loans rising pretty substantially by three times what they were. They’ve had to add to their loan loss reserves to try and shore up the bank’s balance sheet behind those weak loans.
Those are all in play and with interest rates remaining large, a lot of these loans are now just starting to reprice – these commercial real estate loans.
Now the question is: can the borrower, instead of having a cap rate of 5% or 6%, have a cap rate of 9% or 10% and still make that work?
So the industry is vulnerable. The Fed knows that, and I think the market investors know that as well.”
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