U.S. economic growth, outpacing other countries, may pose global risks if the Federal Reserve is forced to raise interest rates higher than expected, potentially leading to financial tightening and ripple effects in emerging markets.
Despite the appearance of a "Goldilocks" economy, with falling inflation and strong economic growth, rising yields on American government bonds are posing a threat to financial stability, particularly in the commercial property market, where owners may face financial distress due to a combination of rising interest rates and remote work practices. This situation could also impact other sectors and lenders exposed to commercial real estate.
The increasing risks of extreme weather events from climate change are causing insurance companies to raise rates and pull back from high-risk areas, which could potentially lead to losses for banks that rely on insurance-backed collateral for loans.
The ballooning student loan debt in the US and the market of student loan asset-backed securities (SLABS) are raising concerns among experts, with some fearing that SLABS could pose a similar systematic risk to the economy as subprime mortgage-backed securities did in 2008. While some experts worry about the affordability issue and the potential struggles faced by borrowers, others believe that the SLABS market is smaller and less likely to trigger a financial crisis.
The US economy may face disruption as debts are refinanced at higher interest rates, which could put pressure on both financial institutions and the government, according to Federal Reserve Bank of Atlanta President Raphael Bostic.
The US banking industry faces significant downside risks from inflation and high interest rates, which could weaken profitability and credit quality, according to FDIC Chair Martin Gruenberg.
Bank of America warns that the US economy still faces the risk of a "hard landing" due to rising oil prices, a strong dollar, and potential interest rate hikes by the Federal Reserve, contrasting with the optimistic outlook of other Wall Street banks.
Bank of America has identified five risks to the stock market but remains optimistic and finds attractive opportunities in stocks compared to bonds.
Despite bond rating agencies issuing warnings and downgrades for banks in the US, equity analysts argue that the warnings were inaccurate due to rising bank stock prices and better-than-expected earnings reports. However, the regional banking sector has still experienced a significant decline this year and faces uncertainty regarding the future role of banks in providing credit to the economy. Additionally, the debate about banks revolves around interest rates and the state of real estate, particularly office buildings.
US banks are experiencing significant deposit outflows, with total bank deposits plunging by over $70 billion in a week, the lowest levels since May, leading to concerns about the ongoing regional banking crisis; meanwhile, US commercial banks have also suffered significant losses in deposits, with 60% of deposits moving to higher-yielding money market funds, and the balance of unrealized losses on securities at commercial banks rising to $558 billion in Q2; to address these issues, the Federal Reserve has reached an all-time high of $107.8 billion in its banking loan facility to provide funding to distressed banks.
Rising interest rates caused by the steepest monetary tightening campaign in a generation are causing financial distress for borrowers worldwide, threatening the survival of businesses and forcing individuals to consider selling assets or cut back on expenses.
Stocks may not be as negatively impacted by higher interest rates as some fear, as the Federal Reserve's forecast of sustained economic growth justifies the higher rates and could lead to increased stock valuations.
