Today we’d like to let our readers know about the banking crisis short-term opportunity for buyers. By now everyone has heard about the banking crisis that brought down 2 banks in the US and put pressure on several regional banks.
This banking crisis may affect borrowers in the short-term and create real opportunity in a few ways. Let’s explain why, and how these banks became under pressure.
How it Started
Silicon Valley Bank lent out money on risky capital venture clients. This did not help, but it is not what really got them into trouble. The trouble point was an asset-liability mismatch. They took in deposits from wealthier clients and reinvested that money into safe US treasury bonds. I say safe, because they are guaranteed by the full faith and credit of the United States. The unsafe part was mismatching the maturity dates. SVB was forced to rely on buying treasuries because loan demand fell due to rising rates.
As rates began to rise, wealthier clients expected more return on the deposit side, and they knew how to switch banks and investment vehicles if they didn’t get it. Many of the larger banks are under a CET1 capitalization ratio of around 12.5%. Banks like SVB may have only been at 7%.
The deposits were invested in bonds and guaranteed safe. However, they did not expect people to withdraw money so fast seeking higher returns. SVB got caught short on their cash. Remember, they only had 7% minimum they had to carry. They could sell the US Bonds, but bond prices have an inverse relationship to yield. As yields went up by the Fed raising rates, the locked in invested bonds by SVB were at lower rates. To meet the cash drawdown from depositors seeking higher return, they had to sell those US bonds at a discount.
Proper Risk Management
Selling their assets at a discount further exacerbated their capitalization requirement. They went from a minimum of 7% down to zero. In essence, they were insolvent, even though they had invested in high quality guaranteed assets. The bank couldn’t wait for them to mature to pay off depositors seeking higher return. SVB couldn’t match the higher rates because they didn’t have sufficient yield spread as they were locked into lower rates. In essence, they were caught flat footed. Supposedly Silicon Valley Bank dropped a hedge against rising rates in 2022. Some speculate this was to boost profits at the expense of unnecessary risk.
Rapidly rising interest rates put pressure on banks like SVB and some regional banks. Loan demand fell. They had to get income from bonds, but those bonds went down in value everyday as rates rose. It was a catch-22.
Ironically, the Fed may have to slow down or pause rate hikes to save the banks. Most experts feel like the Fed needs to raise the terminal rate to above the inflation rate. This would require rates to rise, but maybe they can’t. And maybe layoffs and the banking crisis which may lead to less lending in and of itself will help with inflation.
One thing is for sure. Washington has to quit spending more money and injecting more money supply into the economy. This is what caused inflation, and it is making the Fed’s job tougher. The tougher the Fed’s job is, the more pressure it puts on jobs, banking, and everything in the economy.
Banking Crisis Short-Term Opportunity for Buyers
Look at the weekly inventory graphs. Rates were rising the past 2 weeks, and so was inventory for both single family and condo. Rates took a tumble this past Monday on the banking crisis news. This may cause the Fed to slow down future rate hikes to protect the banks. This could be the short-term opportunity buyers have been waiting for. If so, look for inventory to fall if buyers snatch up more properties.
By Tuesday rates were headed back up. We’ll be watching. Next week will be a big week when the Fed announces March 22nd.
If you have a property to sell in SW Florida, call Brett or Sande Ellis at 239-310-6500. Or visit www.SWFLhomevalues.com to get your instant value. If you’re a buyer, call one of our buyer specialists at 239-489-4042 or visit www.LeeCountyOnline.com to search the MLS. Opportunity is knocking!