Game of Trades: A Storm Is Coming for Banks

It’s now been six months since the second and third-largest bank failures in U.S. history. While investors have largely shrugged that off and focused on tech stocks, there could be considerable dangers ahead.

When that happens, bank stocks tend to get hit the worst. That’s because banks often see big write-downs when they report earnings. And investors tend to take a “sell first and ask questions later” attitude.

Currently, banks face multiple potential dangers.

The biggest is the U.S. office vacancy rate. It’s still well under the pre-pandemic level. And it’s unlikely to improve at any point. Many companies renewing their office spaces are shrinking their footprints.

Some office building owners are already throwing in the towel in places like San Francisco. In short, banks with significant exposure to office buildings could be at risk.

The next biggest potential danger is depositor flight. That’s what caused the bank failures earlier this year. It wouldn’t take a bank panic, either. Many banks pay low, if any, interest on their accounts. Yet investors can move to money market funds or U.S. Treasuries for higher yields. That could entice depositors to move their money to earn a higher yield.

If interest rates creep higher, investors looking to protect their capital may do just that. U.S. Treasuries are considered risk-free. And even insured bank deposits could take time to sort out in a bankruptcy.

To watch the full analysis on the dangers for the banking sector, click here.