Interest rates are shooting up and in some cases have reached the highest levels in decades. The share prices of US regional banks are collapsing again. And yet reports of new collapsing banks remain absent. Why?
Deposits!
The chart below provides the answer to that question. Despite continued competition with money market funds, deposits of smaller US banks are steadily increasing. Compared to a year ago, there has been a modest growth of 2 per cent.
This means that all those “accounting” losses on US government bonds also remain paper losses. Rising deposits mean that losses do not have to be realised to allow for outflows. Of course, another factor is that most of the ‘rotten apples’, such as Silicon Valley Bank, which really made a mess of things and apparently had never understood anything about duration risk - have already seen their Waterloo.
So why are share prices by no means recovering from the woes of March this year? The answer to that question, too, is simple. To keep those deposits in, interest rates paid on deposits have to go up substantially. That completely erodes profitability in some cases.
Should we rule out the possibility of new interest rate victims? I would certainly not put the probability at zero. The main reason is that smaller US banks are extremely over-represented in loan growth to commercial real estate. Good luck with that!
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His chart of the week appears every Monday on Investment Officer Luxembourg.