There's no need to panic over the state of America's banks. But here is why customers should be wary.
Federal Reserve Board Chair Jerome Powell is expected to speak Aug. 25, 2023, about inflation and risks to the banking sector at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming.
Making matters worse is the disaster unfolding in the market for office properties. Many banks made five-year loans at rock-bottom rates when commercial real estate was surging just before the pandemic. In the aftermath, with the rise of remote work, that same real estate has lost value and stopped generating cash flow. That makes it nearly impossible to refinance at today’s higher rates, which have swiftly turned good loans into bad loans.
The Fed may need to continue increasing interest rates to battle persistent inflation, and it’s nowhere near dropping them, so pressure from that part of the equation is likely to continue. On top of that, the Fed in July laid out a sweeping plan to increase capital requirements, forcing banks to hold onto more money to protect against disruptions. The Fed noted that the bank failures earlier this year show that even mid-size institutions can create systemic risks by eroding confidence.
Whatever else happens, the Fed needs to avoid a meltdown like the 2008-09 crisis, when the federal government threw hundreds of billions into righting the financial sector and bailing out giant banks. If higher capital requirements are the price of sidestepping a repeat, the negative effects would be well worth it.
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