September 30, 2023

,‘There is a lot of commercial real estate assets in the banking sector and there are some losses that will probably work their way through the banking sector. So this process will take time to become completely clear.,

– Neel Kashkari, Minneapolis Fed President

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Neel Kashkari, president and chief executive officer of the Federal Reserve Bank of Minneapolis, explains the state of the banking system during an interview on CBS’s “Face the Nation” Sunday.

The panic surrounding the banks has raised some questions about the roughly $5.5 trillion US commercial real estate loan market.

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Rising interest rates can make it more difficult for property owners to refinance loans, and the overall value of real estate loans has declined, adding to the risk appetite of banks. Smaller banks have become major players in commercial real estate over the last two decades.

The Fed chairman emphasized that the banking system is “resilient and robust,” but cautioned that problems arising from the banking sector may not go away.

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“We know there are other banks that have some exposure to long-term Treasury bonds that have some duration exposure, as they call it, on their books,” Kashkari said.

He said the current challenges with banks “certainly bring us closer to recession” but warned it was still too early to know the impact of troubled banks on the economy.

Kashkari said that while large deposit withdrawals at some small to medium-sized banks have slowed in recent weeks, parts of the capital markets have been “largely shut down”.

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Last Wednesday, the Fed voted unanimously to raise its benchmark federal-funds rate by a quarter percentage point to a range between 4.75% and 5%, marking its ninth straight increase, and raising concerns about the health of the financial system. did so despite concerns about Problems related to major lenders, including Silicon Valley Bank, as well as international banks such as Credit Suisse CS,
and Deutsche Bank DBK,


Rising interest rates have put a burden on some lenders, at least in part, because banks are forced to offer higher interest in the short term on deposits, regardless of the interest rates they charge on longer-term loans. , are not growing that fast. A rate hike by the Fed is pushing up yields for short-term debt, but fears of an economic downturn down the road are pushing yields lower, which is inversely related to prices.

That dynamic has had an impact on the profitability of financial institutions.

On top of that, not all banks are managing risks effectively, for example, SVBs are bound to sell assets at a loss to meet deposit withdrawals.

Investors worry that the failure of SVB and other banks could spread across the region and parts of the world if jittery customers continue to take deposits from the few, mostly small, lenders.

LookFed slashes emergency lending, a sign bank pressure may be easing

Kashkari is the 2023 voting member of the Fed’s rate-setting Federal Open Market Committee,

Fed Chairman Jerome Powell said the Fed is focused on its fight against rising inflation, even as he acknowledged that stability of the banking system is on the Fed’s radar. Forecasts now show the Fed raising rates just one more time this year, to a range of 5%-to-5.25%.

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Markets ended higher last week with the Dow Jones Industrial Average DJIA,
rising 1.2%, while the S&P 500 SPX,
Advanced 1.4% and Nasdaq Composite Index Comp,
1.7% advanced, according to FactSet data. The Dow snapped two consecutive weeks of losses, while the S&P 500 and Nasdaq each posted back-to-back weekly gains.

Too Why the worst banking mess since 2008 isn’t bothering stock market investors — yet