The US banking industry is facing an imminent crisis as the Federal Reserve continues its efforts to raise interest rates, amidst increasing consolidation and growing concerns over the stock, bond, and real estate markets. Top banks such as JP Morgan and Bank of America now control 31% of deposits in the country, with the top 10 banks controlling 65%. This consolidation is only expected to accelerate, leaving the financial system more vulnerable to shocks and stresses.
David Hay, a financial expert, has raised concerns over the long-term impact of the Fed’s decision to raise interest rates by 25 basis points for the 10th consecutive time. He questions the impact this will have on asset prices and how many more hikes the Fed will make. While the labor market may suffer due to the Fed’s efforts to fight inflation, Hay also points out that the middle class of America is suffering because of inflation.
Moreover, the trend of bank failures and consolidation is alarming, with Hay suggesting that this is just the tip of the iceberg. He believes it might be safer to invest in big banks with experience in taking over distressed banks, such as JP Morgan. The squeeze on bank interest margins due to the shift of money to government securities is also causing distress, with many banks effectively broke and having negative net worth.
Hay predicts a tough summer ahead for the stock market, with the lowest equity risk premium since 2007 and potential mega risks such as the federal fiscal funding fiasco and the bursting of the global housing bubble. He warns of the potential consequences of a dramatic increase in interest rates for commercial real estate and notes that the bond market is sending a different signal than the stock market, indicating potential recession and a significant readjustment of asset prices.
The ongoing crisis has also highlighted the divergence between the VIX Index and Move Index, which could be significant, and the alarming divestment of US Treasuries by foreign central banks. With the treasury missing an opportunity to turn on its debt, the fiscal funding crisis could worsen in the second half of the year.
The US banking industry is on the verge of a major crisis due to the Fed’s continuous interest rate hikes, increasing consolidation, and looming financial market risks. It is crucial for regulators and policymakers to address these issues before they escalate into an uncontrollable catastrophe.
