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any homogeneity? American banks are bankrupt – the imminent cycle of death is inevitable

any homogeneity?  American banks are bankrupt – the imminent cycle of death is inevitable

Unrealized US bank losses are actually $1.75 trillion

With his serious new intervention, via Project Syndicate, brought to you Banks and newsthe Nouriel Roubini He is quick to dispel myths about normalization in the US financial sector.
It also indicates that US banks are already suffering from unrealized losses At the level of 1.75 trillion. dollars, or 80% of its capital … Indeed, “given the quality of their capital, most of them are technically semi-insolvent while hundreds are already fully insolvent (i.e. bankrupt).”
In particular, Roubini wrote:In January 2022, when 10-year US Treasury yields were around 1% and German bund yields were -0.5%, I warned that inflation would hit stocks as hard as bonds.
More specifically, I was saying that higher inflation will lead to higher returns on “safe” bonds, which in turn will hurt stock prices because of the inverse relationship between yields and prices.
This basic principle, known as “term risk”, seems to have been forgotten by many bankers, fixed income investors and regulators.
As inflation in 2022 boosted returns, the US 10-year lost significant value (-20%) against the S&P 500 (-15%), who held long-term assets in dollars or euros. They stayed with … the bag.
The consequences for these investors were dire.
By the end of 2022, US banks’ unrealized securities losses amounted to $620 billion – about 28% of their total capital. ($2.2 trillion).
Things got worse when higher interest rates reduced the value of the banks’ remaining assets.
If you have a 10-year bank loan with a long-term interest rate of 1%, and as those rates go up to 3.5%, the real value of that loan (what someone else in the market is paying you for it) will go reasonably under.
The accounting science for this indicates that the unrealized losses of US banks are in fact $1.75 trillion, or 80% of their capital.
The “unrealizable” nature of these losses is just an artifact of the current regulatory system, which allows banks to value securities and loans at face value, rather than their real value, which is also reflected in the market.
In fact, judging by the quality of their capital, most US banks are technically close to bankruptcy, and hundreds are already fully insolvent.

economic inflation

Certainly, inflation reduces the real value of banks’ (deposit) liabilities by increasing interest deposits, an asset that does not appear on their balance sheets (i.e. interest deposits allow banks to pay low deposit rates that are insensitive to market interest rates).
However, its maintenance requires high fixed costs.
In order to offset the interest rate risk arising from these fixed costs, banks with strong deposit lien try to reduce the sensitivity of their interest income (NII) to interest rate marketing by holding long-term fixed-rate assets).
Since banks still pay close to 0% on most of their deposits, even though overnight interest rates have risen by 4% or more, the value of this asset increases when interest rates go up.
In fact, some estimates suggest that higher interest rates have increased the total value of American bank concession deposits by nearly $1.75 trillion.
But this asset only exists if deposits remain in banks amid rising interest rates…
Given what happened to US regional banks, Silicon Valley bank and others, we are now in a position to know that such stability is far from guaranteed.
If depositors flee, lien deposits evaporate and unrealized losses on securities are realized… while banks sell them to meet withdrawal requests.
Then bankruptcy becomes inevitable.

“Depositors are stupid”

Furthermore, the “deposit privilege” argument assumes that most depositors are stupid and will keep their money in accounts with almost 0% interest, even though they may earn 4% or more in perfectly safe funds that invest in short-term bonds.
But then again, we now know that depositors are not happy with that.
The current, and apparently continuing, cause of uninsured – and even insured – depositors is likely as much their pursuit of higher returns as their concern about the safety of their deposits.
In short, despite being non-functional for the past 15 years – since both political and short-term interest rates fell to near zero after the 2008 global financial crisis – deposit interest rate sensitivity is back in the fore.
Banks took on highly predictable duration risks because they wanted to reduce their net interest margins.
They took advantage of the fact that while the principal charges on government bonds and mortgage-backed securities were zero, losses on these assets did not have to be marketed.
At the same time, regulators have not even subjected banks to stress tests on how they would fare in a scenario of a sharp rise in interest rates.
Now that this “house of cards” has collapsed, the looming credit crunch will send the real economy into a hard tailspin, due to the particularly important role that regional banks play in financing small and medium-sized businesses and households.
So central banks face not just a dilemma, but a triple dilemma.
Given aggregate supply shocks from factors such as the pandemic and the war in Ukraine, stabilizing prices through higher interest rates inevitably amplifies downside risks (recession and high unemployment).
But, as I have been arguing for more than a year, this also carries the potential for severe financial instability.
Borrowers face higher interest rates – and therefore higher costs of capital.
Rising long-term interest rates also cause huge losses to creditors who own long-term assets.
As a result, the economy falls into a “debt trap”, with high public deficits and debt imposing “fiscal sovereignty” over monetary policy, and high private debt causing “fiscal sovereignty” over monetary and regulatory authorities.

Trillium

As I warned long ago, central banks In the face of this triple dilemma, it is likely to reverse course (reduce easing in monetary policy) to avoid self-reinforcing economic and financial collapse, which ultimately triggers inflation expectations.
Central banks should not delude themselves that they can still achieve price stability as well as financial stability through some kind of decoupling (raising interest rates to fight inflation while supporting liquidity to maintain financial stability).
In a debt trap, rising interest rates will fuel systemic crises that cannot be avoided.
Nor should central banks assume that the next credit crunch will kill inflation by curbing demand.
After all, the disruptions in aggregate supply have “continued” while the labor market remains very tight.
A severe recession is the only thing that can mitigate price and wage inflation, but it will make the debt crisis more acute.
This, in turn, will lead to a deeper recession.
Since the current liquidity cannot prevent this episode of systemic catastrophe, everyone should prepare for the next inflationary debt crisis.
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