Banking Stress: What it Means and What’s Next

Banking Stress: What it Means and What’s Next

The Fed’s assault on inflation, in the form of the most aggressive rate-hike campaign since the early 1980s, has begun to reveal cracks in the edifice of the U.S. economy. Since March, weaknesses have been exposed in the banking sector, with stress emanating from a combination of higher rates, deposit flight, a slowing economy, and management missteps for select institutions. With the dust starting to settle on a short string of bank failures, we analyze the impact in a two-part commentary.

First, in Banking Turmoil: Industry Impacts and Broader Economic Risks, we look at what impact the banking stress could have on the industry, with particular focus on the ability for small, mid-sized, and regional banks—a key life blood of the U.S. economy—to compete against global, systemically important banks (GSIBs). Next, in Commercial Real Estate and Banking Sector Risks, we dig into one of the key risks facing non-GSIB banks. Commercial real estate (CRE), and in particular the office segment, has faced challenges in the post-pandemic recovery. We provide our assessment of the risks to those banks most exposed to CRE, as well as the reciprocal ability of banks to fund CRE itself.

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