Cracks Are Really Starting To Show In Banks’ Balance Sheets

Cracks Are Really Starting To Show In Banks’ Balance Sheets
Reda Farran, CFA

4 months ago1 min

Investors, already shaken by the collapse of three regional lenders in the US this year, have been watching closely for signs of stress in the banking industry as rising interest rates force firms to pay more for deposits and push up the cost of funding from other sources. What’s more, those higher rates are diminishing the value of banks’ assets and making it harder for commercial real estate borrowers to refinance their debts at a time when demand for office space is falling.

Taken together, lenders' balance sheets have deteriorated significantly, pushing Moody’s Investors Service to downgrade the credit ratings of ten regional American banks this week. The firm also said that it may downgrade major lenders including U.S. Bancorp, Bank of New York Mellon, State Street, and Truist Financial as part of a sweeping look at mounting pressures on the industry.

To put lenders' deteriorating balance sheets into perspective, consider this: a recent analysis shows that US banks incurred nearly $19 billion in losses on bad loans in the second quarter of this year (blue line). That’s a 17% jump from the prior quarter and 75% from the same quarter last year. Rising defaults from credit card and commercial real estate borrowers, particularly those with floating-rate loans, were a major factor, especially after the US central bank raised interest rates to a 22-year high in a little over a year.

The situation is a stark departure from recent history, when loan losses in the US fell to historically low levels right after the pandemic on the back of low unemployment and big government stimulus programs. But bank executives have repeatedly warned that the benign credit environment would not last, and they might just have had a point…



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