George Gammon: Did the Next Phase of the Banking Crisis Just Start?
It’s been nearly one year since the economy saw the second, third, and fourth largest bank failures in history. When trouble reared its ugly head last March, regulators were quick to shut down these banks. And move their assets over to stronger banks.
What caused these banks to fail? It was mostly the high risk of a bank run due to duration risk. Many banks invested in long-term bonds. Those fell in value as interest rates rose. It left banks illiquid.
To avoid that trouble, the Federal Reserve created a lending facility. They would hold assets such as long-term bonds, and pay banks the full face value. There would be no risk of having to cash out a bond at a loss.
While that restored faith in the banking system, the lending program came with a one-year expiration date. The Fed announced in January that they would not renew it.
That could mean a renewal for the banking crisis. Investors are already seeing cracks, as indicated by the dividend cut at New York Community Bancorp (NYCB). The regional bank’s issues stemmed from its office loans, not its bond portfolio.
Other banks could see similar issues. The office space sector continues to lag the rest of the real estate market. And several property owners have either sold at steep losses or are looking to walk away.
For now, investors may want to scale out of bank stocks and look to buy later when regulators step in again.