Offices represent around a quarter of total commercial real estate debt held in the US banking system. The key question is how much further will credit losses increase? But they are now rising, most notably in areas that can act as leading indicators of borrower stress, such as subprime car loans and credit cards. During Covid-19, credit losses fell to historically low levels, supported by large fiscal stimulus in the initial phases of the pandemic, and then remained low as the economy re-opened, helped by low unemployment, strong wage growth, and pent-up savings from the Covid-19 era. ĭefaults on bank loans – otherwise known as credit losses – have begun to creep up in recent quarters. Data from Board of Governors of the Federal Reserve System. From a wider perspective, the resulting tighter availability of credit could also impact the broader economy and limit the ability of firms and households to make investments.Įxhibit 1: Total deposits of US banks (USD billion) This potential reduction in profit margins has led to fears that last year was “as good as it gets” for US banks. As a result of these factors, banks have had to pay more to secure deposits, driving their profit margins down and limiting their appetite to make loans. At the same time, quantitative tightening is acting to drain deposits from the banking system (see Exhibit 1). As a consequence of the aggressive cycle of interest rate increases by the US Federal Reserve, cash now has a value again, and many depositors want to earn the higher rates being offered by treasuries, money market funds, and other non-bank products. Banks’ business models rely on taking in deposits and giving out loans.
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