According to macroeconomist Edin Mujagic, the problems in the US banking system are not eternal, but it must be taken into account that ‘the problems will not disappear from the headlines for a while”.
The number of troubled banks in the US has been building up for some time. Previously Signature Bank and Silicon Valley Bank went bankrupt and earlier this week First Republic Bank was bailed out by JPMorgan Chase. Mujagic sees regional bank share prices reacting strongly to this. “Prices have fallen so sharply that negotiations have been halted several times.” According to the macroeconomist, this is not without reason, because the causes of the problems are different.
Pessimism
The main reason is that there is one main emotion in the US banking landscape today, and that is pessimism. There is always a weaker link. Yesterday it was the First Republic Bank and tomorrow it will be a new one, it continues to function’, explains the macroeconomist.
In addition to the general pessimistic sentiment, regional banks in the US will soon come under a different kind of oversight. That’s good news in the long run, but bad news for bank profitability, according to Mujagic.
Also, regional banks in America are filled with commercial real estate, which is doing very badly for various structural reasons. For example, interest rates are higher and the value of commercial real estate has gone down. Many Americans are also working from home, which left one in five U.S. office buildings vacant at the end of March, according to Mujagic.
Inverted yield curve
According to the macroeconomist, this is not enough. The so-called inverted yield curve is also causing problems for US banks. ‘The core of a bank’s business model is that money is attracted for a short time and is lent for a long time. The difference between them is the profit margin. But with the yield curve inverted, long rates are lower than short rates, which spells bad news for bank profitability,” Mujagic explains.
“The chance of you, as a regional bank, being helped by a central bank is minimal these days”
Normally, a regional bank might turn to a central bank for help, which has often been a bright spot in dark situations in the past. According to Mujagic, central banks were willing to lower interest rates, but this is difficult due to the current high inflation. “I’m convinced the Federal Reserve would like to help now, but can’t because inflation is too high. In this case, the possibility that you, as a regional bank, will receive help from the corner from which you have always received it, is minimal.’
Interest decision
The Federal Reserve is set to issue an interest rate decision later today and is expected to raise interest rates by 25 percentage points. According to Mujagic, dangers lurk if the Fed decides to cut interest rates or suspend policy. If you stop rising now while interest rates are still too low to talk about a decisive war on inflation, you have to take into account that inflation will be higher in the long run. “And then the inverted yield curve – which is disastrous for banks – can also stay inverted for longer.”
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
