Don’t panic, but...

The next shoe is about to drop in America’s ongoing banking turmoil

Financial journalists just love market panics. For them at least, the relative stability that comes in between is by comparison dull and boring, if admittedly also rather more conducive to economic well-being and rising living standards.

If the panic is essentially over before it even properly got going, that would indeed be a relief.

Barring an immediate monetary loosening – which with inflation still not tamed seems unlikely – I see no obvious way of fixing the underlying problem. The speed and extent of the tightening to date has left many financial institutions wrongfooted. The surprise is that it has not already resulted in much greater carnage. 

Any continued outflow of deposits from banks into higher interest money market funds will only deepen an already looming credit squeeze. Doubts about solvency have caused deposit flight, which in turn is forcing some banks to shrink the lending side of their balance sheets.

One glaring vulnerability is the commercial property market, both in the UK and the US. It was this type of lending, not domestic mortgages, that sank Lehman Brothers in the US, and HBOS and Royal Bank of Scotland Group in the UK, during the banking crisis of 2008-10.

In the US, lending to the commercial real estate sector is dominated by the country’s already vulnerable small and mid-tier banks.

Lending to commercial property accounts for about 40pc of all loans by smaller US banks.  “These banks account for about 70pc of outstanding loans to the commercial real estate sector.”

Jeremy Warner Telegraph 28 March 2023

Money-market funds, low-risk investment vehicles that park money in short-term government and corporate debt. 

Such funds saw inflows of $121bn last week as svb failed.

A bloodbath awaits commercial property investors


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