HomeBusinessthe professor who sees a $2 trillion hole in the economy predicts...

the professor who sees a $2 trillion hole in the economy predicts a thinning of the herd

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

Tomasz Piskorski, professor of finance at Columbia, is one of the leading experts on examining the post-SVB landscape, as one of the co-authors of a widely read 2023 study showing a decline in asset values of banks by $2 trillion is estimated after the monetary tightening of the previous year. . At the Fortune At the Future of Finance conference in New York City, Piskorski said the long-term consequences of higher interest rates and new regulations will result in banks becoming less central to the financial system, as private lenders and non-bank mortgage lenders such as Rocket Mortgage the choice picks up the slack.

“Banks are becoming less and less relevant, especially smaller to mid-sized banks,” Piskorski, the Edward S. Gordon professor of real estate at Columbia, said Thursday. “Because of the consolidation in the banking sector, I predict that in two years we will have far fewer smaller to medium-sized banks.”

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Banks are being forced to confront new risks after the pandemic, as the Fed’s tight monetary policy devalues ​​many of their loans and real estate holdings. They are also experiencing 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 within days.

SVB’s customers began withdrawing their deposits after concerns surfaced about losses the bank had suffered on its long-term investments in government bonds, which went underwater after the Fed started raising interest rates – so-called “duration risk.” The SVB simply couldn’t handle the speed of the bank run, forcing the FDIC to step in and refund depositors, a new problem facing banks.

“The rules we have around liquidity were written before a time when you could transfer millions of dollars with a small device in your hand while riding the subway,” 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.”

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

“There are quite a few banks in the United States right now that have very similar risk characteristics [to SVB],” said Piskorski. “[They] where the market value of their assets is less than the face value of their debts… If the savers show up, there will basically be bank runs, unless of course the regulators intervene.”

Commercial real estate has become an important focus for banks and regulators. Office building values ​​have fallen after the pandemic as the rise of remote work has reduced demand for personal desk space, leaving many banks on the hook for expensive real estate loans they signed a decade ago. They are forced to shake things up by refinancing at high rates, selling their properties for a few cents on the dollar, or defaulting.

Mid-market banks are especially vulnerable: according to Piskorski, they hold about 40% of their assets in CRE loans. That overweight exposure has already led to flare-ups in the banking sector, such as New York Community Bank’s bailout in March.

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“In general, the banking sector is very stable. Federal regulators did a fantastic job last spring… to contain the contagion we’ve started to see across the banking industry, from SVB to Signature [Bank], but there are still risks in the sector as a whole,” Harris said. “Many regulators, both at the federal and state levels, keep a close eye on commercial real estate.”

Piskorski predicts that as struggling CRE portfolios and maturity risks continue to weigh heavily on the banking sector, sector-wide tightening is on the horizon, possibly in the form of consolidation – and new, smoother forms of lending will fill the slack. New regulations that may impose higher capital requirements will also force smaller banks to tighten their belts, shrinking their margins and creating opportunities for private lenders or non-bank lenders like Rocket Mortgage.

“If regulators decide to crack down, we will see further contraction of smaller and mid-sized banks,” Piskorski said. “We will see growth [market share for] debt securities and private credit.”

This story originally appeared on Fortune.com

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