Why Predictions of Bank Failures Keep Rolling in
After the bank failures of 2023, many Americans-understandably-are on high alert. When a bank fails, it doesn't just impact the employees and customers of that bank. It can spark a damaging chain reaction that impacts the broader economy. For one, it can create panic and cause runs on other banks, causing even more to fail. It can also result in less access to loans for small businesses or operations that might not get off the ground (or make it through a tough spot) without borrowing. Eventually, you have more and more businesses and people facing financial hardship. It's a case of "misery loves company".
Concerningly, 2024 has seen more predictions of bank failures continue to roll in. There are two primary reasons why financial thought leaders continue to worry about bank failures this year.
First, many banks are already hurting. High interest rates are the equivalent of a flat tire to a bank's business. When debt is expensive, demand for borrowing suffers. At the same time, bank customers who do borrow, are more likely to default due to the higher payments they face. This loss of revenue is compounded by the bank's higher cost of doing business. Afterall, high interest rates also increase demand for products like high yield savings accounts, which means the bank now has to pay its customers more for their deposits.
This, alone, might not be so concerning. Interest rates have been this high before. (However, that was 20 years ago and the last time rates have risen this rapidly was close to 40 years ago.) Many were expecting a reduction in interest rates, but the Fed is offering no relief at this time. Still, the big problem is not the interest rate environment we find ourselves in, but the looming catalyst so many banking insiders are dreading: the fact that nearly $1 trillion in commercial real estate loans will mature in 2024.
Commercial real estate is its own can of worms. Covid was not kind to this industry. Rather, it extinguished businesses that once occupied its buildings and convinced many employers that they can save money on office space by having employees work from home. Therefore, it's little surprise that the values of commercial properties are plummeting. When those loans mature, how will landlords afford to renew them? They now have vacant buildings that are worth less and would have to renew at a higher interest rate. Ouch!
Suffice it to say that banks with high exposure to commercial real estate are bracing for impact. Already this year, foreclosures are up 117% over 2023. Now, investing world powerhouses are sounding the alarm.
"The real wave of distress is just starting,"
John Murray, Pacific Investment Management Co. Bloomberg
"We see more risks of bank failures, and a lot of forced consolidation across banking,"
Greg Friedman, Peachtree Group MSN
“You’re going to see a regional bank fail every day, or not - every week, maybe two a week,”
Barry Sternlicht, Starwood Capital Group Business Insider
So why doesn't the Fed just lower interest rates? Well, they're trying to regulate inflation. The cruel irony is that main street will likely suffer whether the Fed adjusts rates or not. Inflation is akin to a "death by a thousand papercuts" while the anticipation of bank failures feels more like a vague bomb threat. We don't when. We don't know where. And we can only imagine the destruction it will cause.
Fortunately, precious metals ownership offers a silver lining. (Yes! Pun intended.) By holding a portion of our assets in physical gold or silver (under our own control) we can insulate ourselves from the dubious stewardship of banks. The other benefit is perhaps best described by economic trend forecaster, Chris Martensen:
"Various factors lead me to conclude that gold is one investment that you can park for the next 10 or 20 years, confident that it will perform well."
Said differently, owning gold not only puts us in the driver’s seat, it can also offer the peace of mind we crave in these uncertain and troubling times.