“Banks Are Becoming Increasingly Less Important”: The Professor, Who Sees a Two Trillion Dollar Hole in the Economy, Predicts That the Bank Will Thin Out - Latest Global News

“Banks Are Becoming Increasingly Less Important”: The Professor, Who Sees a Two Trillion Dollar Hole in the Economy, Predicts That the Bank Will Thin Out

The collapse of Silicon Valley Bank in March 2023 was a turning point for the banking sector. The $210 billion slump was the third-largest in American history, sending shockwaves throughout the industry and exposing solvency problems caused by rising interest rates.

Colombian finance professor Tomasz Piskorski is one of the leading experts studying the post-SVB landscape and one of the co-authors of a widely read 2023 study that shows a $2 trillion decline in bank assets after monetary policy tightening last year is appreciated. At the Assets Speaking at the Future of Finance conference in New York City, Piskorski said the long-term consequences of longer-term higher interest rates and new regulations will make banks less central to the financial system, as private lenders and non-bank mortgage lenders like Rocket Mortgage have a choice close the gap.

“Banks are becoming increasingly less relevant, particularly smaller to mid-sized banks,” Piskorski, the Edward S. Gordon Professor of Real Estate at Columbia University, said Thursday. “Due to the consolidation in the banking sector, I assume that in two years we will have significantly fewer small to medium-sized banks.”

Banks are being forced to face new risks in the wake of the pandemic as the Fed’s restrictive monetary policy devalues ​​many of their loans and real estate holdings. They are also grappling with a series of bank failures that have shown how quickly a seemingly stable bank can go under. Last March, Santa Clara-based SVB collapsed virtually overnight after depositors withdrew $175.4 billion in deposits in just a few days.

SVB’s customers began withdrawing their deposits after concerns emerged about the bank’s losses on its long-term Treasury holdings, which became underwater after the Fed began raising interest rates – so-called “duration risk”. The SVB simply couldn’t handle the speed of the bank run and demanded that the FDIC step in and return the money to depositors: a new problem facing banks.

“Our liquidity regulations were written before you could move millions of dollars on the subway from a tiny device in your hand,” said Adrienne Harris, superintendent of the New York State Department of Financial Services, the state’s financial regulator. “You see that 20% of deposits leave an institution within four hours. We’ve never seen anything like this before.”

Bank runs aside, the macroeconomic conditions that led to bank failures last year have not gone away – Piskorski said there are likely many banks facing the same hidden solvency problems as SVB.

“There are currently a number of banks in the United States that have very similar risk characteristics [to SVB]said Piskorski. “[They] when the market value of their assets is less than the face value of their debts… When the depositors show up, there is essentially a run on the banks – unless, of course, regulators intervene.”

Commercial real estate has become a key problem area for banks and regulatory authorities. The value of office buildings has plummeted following the pandemic as increased remote work has reduced demand for on-site jobs and many banks are reliant on expensive real estate loans they underwrote a decade ago. They are forced to screw things up by refinancing at high interest rates, selling their properties for pennies on the dollar, or defaulting.

Mid-market banks are particularly at risk – they hold about 40% of their assets in CRE loans, according to Piskorski. This overweight exposure has already led to crises in the banking sector, such as the emergency bailout of New York Community Bank in March.

“In general, the banking sector is very stable. Federal regulators did an outstanding job last spring… to contain the contagion we saw across the banking sector from SVB to Signature [Bank]“But there are still risks in the industry as a whole,” Harris said. “Many federal and state regulators are watching commercial real estate very closely.”

Piskorski predicts that as the banking sector continues to be heavily burdened by troubled CRE portfolios and duration risk, an industry-wide tightening is on the way, possibly in the form of consolidation – and that new, more flexible forms of lending will pick up the slack. New regulations that may impose higher capital requirements will also force smaller banks to tighten their belts, squeeze their margins and create opportunities for private lenders or nonbank lenders like Rocket Mortgage.

“If regulators decide to crack down, we will see further declines in small and medium-sized banks,” Piskorski said. “We will see growth [market share for] Debentures and personal loans.”

This story was originally published on Fortune.com

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