WisdomTree Minds on the Markets
Minds on the Markets
Minds on the Markets
Archive: July 17, 2023
The Global “Bank Walk” Has Been More of a Crawl
It has been more than four months since the surprise collapse of Silicon Valley Bank (SVB), 2023’s most notable financial system-related scare (thus far). In our modern environment, where our bank accounts are a button away, the rapid movement of money caused New York’s crypto-specialist Signature Bank to buckle just days after SVB, bringing forth a whirlwind rumor mill as to which small or mid-sized bank could or would be next.
While what happened to a handful of lenders—and the big dynamo Credit Suisse a few weeks later—was a series of classic bank runs, our concern was that the system could witness a drawn-out “bank walk.” In that scenario, fear is not the driver of withdrawals; opportunity is. Even now, all these months after the heat got put on regional lenders, US banks average about a half percent yield on savings accounts.
But by and large—and to our surprise—the Bank Walk hasn’t droned on to the extent that many feared. Things were looking dicey for a while; commercial bank deposits peaked at $18.21 trillion almost a full year before SVB went under, then drifted down in an orderly manner—at least as far as systemwide deposits were concerned—to $17.23 trillion in spring 2023. But recent weeks have seen a small reversal; deposits came back to $17.34 trillion at the half year mark.
Not a moment too soon either. Coming as little surprise to just about anyone, the last few weeks have brought a series of reports of record office vacancy rates in New York, DC, Chicago, Atlanta and Baltimore, while even ostensibly hot markets such as Austin and South Florida also posted stagnant occupancy figures. The bulk of the country’s office loans sit in the worst possible place: on the balance sheets of regional banks. The concern: what happens if deposits walk out the door, let alone “trot” out, at the same time commercial property loans sour? The good news is that for now, the deposit base part of that fear is partially quelled, at least in the US. The jury is still out on the commercial property part.
The situation is touch and go overseas. Reuters reports that Italian banks witnessed a €20 billion decline in residents’ deposits in May, bringing the total to €2.614 trillion, a level last seen over two years ago. According to the European Central Bank (ECB), a typical eurozone bank account yields just 0.21%, a figure that is not even close to the 3.50% central bank policy rate. For Italian banks, if deposit outflows slow, the gap between paltry deposit rates and considerably higher yields across the Continent’s bond market make for an enviable spread. Grant us this stretched analogy: maybe the banks are looking at a year or two that looks like the tobacco and soft drink business model, whereby things work out if consumption declines only a tad while prices are hiked every time you check in on the business.
A similar set-up persists in Britain too. Homeowners there have a knot in their stomach, having to take on a 6% mortgage in a market where home prices are falling. That is another country where typical savings account yields remain below 1%, despite the Bank of England recently hiking its policy rate to 5%. For lenders who are borrowing from Mom & Pop at sub-1% and lending at more than 6%, an orderly Bank Walk can be stomached.
Like in Britain, Mortgage News Daily reports the typical US 30-year home loan is being underwritten at an average rate just short of 7%. Borrow at a half a percent lend at 7%, while losing your client base at a the rate of a slow trickle? Ask the tobacco and cola executives if that’s a bad business model. So long as the banks can strip six percentage points out of the deal, it’s a great one.
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