The banking industry is once again on the brink of crisis. The recent collapse of Republic First Bank highlights the vulnerabilities of regional and community banks. The failure of this institution is not the first. It follows the 2023 collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank (a separate entity from Republic First Bank). This signals deeper issues within the financial sector. Shadow banks, zombie offices, bank runs all play a part in the current state of banking turmoil. Let's take a look at the roles they play. And the steps that individual investors can take to safeguard personal wealth.
The Collapse of Republic First Bank
On April 30, 2024, regulators were compelled to close Republic First Bank. Profits were declining. Their commercial real estate (CRE) portfolio was deteriorating. The bank crumbled under these dual pressures. The Federal Deposit Insurance Corporation (FDIC) seized approximately $6 billion in assets. And another $4 billion in deposits. The failure cost the FDIC $667 million. This event marks the first bank failure of 2024, but experts warn it may not be the last.1
Republic First's collapse is ominous proof of the increasing risks faced by regional and community banks. These institutions are particularly vulnerable. They have substantial exposure to commercial real estate (CRE) loans. And these loans have been significantly impacted by rising interest rates and decreased demand for office space.
The Rise of 'Zombie Offices'
Worsening the banking crisis is the phenomenon of "zombie offices." The office sector is transforming due to work-from-home and utilization change. And some buildings are becoming "zombie offices". These commercial properties remain vacant or underutilized for extended periods. And they contribute little to no economic activity to their locales. Today's high interest rates have made it impossible for property owners to invest in reviving these spaces. It’s just too expensive. This all leads to a significant decline in the value of these properties. 2
In fact, 44% of these office loans currently appear to be in a "negative equity" situation. Wherein the loan is more than the property is worth. To add to this troubling fact, about 80% of the outstanding debt in commercial real estate is held by small and regional banks. And on top of that, approximately $929 billion in CRE loans are set to mature this year. 2
This scenario creates a precarious situation. If these loans default, banks may face insurmountable losses. And with defaults ever increasing, experts believe we could be on the precipice of a major crisis.
The Threat of Shadow Banks
The increasing risks associated with commercial real estate are obvious. But the banking industry faces additional, more hidden, threats. It's called the shadow banking sector. Shadow banks are alternative asset lenders, like private equity firms and hedge funds. They are often less regulated than traditional banks. And they can engage in riskier lending practices than what a regulated bank is allowed. Household-name banks, like Citigroup and Wells Fargo, loan money to these alternative lenders. And in increasing amounts. The total amount is reaching $1 trillion, with an increase of 12% in the last year. This exposure to high-risk debt could have severe implications for traditional banks. Especially if shadow banks suffer significant losses.3
This reliance on short-term funding and complex financial products by shadow banks could spell trouble. It could amplify market volatility and exacerbate liquidity crises. Traditional banks and shadow banks are now interconnected. Any turmoil in the riskier shadow banking sector could have a cascading effect. The broader financial system could be affected.
Fed Policy & the Banking Crisis
Federal Reserve policies have played a significant role in shaping the current banking landscape. The shift from quantitative easing (QE) to quantitative tightening (QT) has done three things: Reduced the money supply, boosted borrowing costs and tightened credit conditions. This policy change, coupled with persistently high interest rates, has strained banks' profitability. This only increases the likelihood of a looming crisis.4
Former International Monetary Fund (IMF) deputy director Desmond Lachman has criticized the Fed's approach. He argues that it is “inviting a banking crisis.” He says that
maintaining a tight monetary policy in the face of economic uncertainties, could trigger a severe recession and further bank failures.4
The Role of the Bank Term Funding Program
The Bank Term Funding Program (BTFP) is a federal program designed to provide emergency funding to banks. The intent was to stabilize the banking industry. And it has been instrumental in limiting the number of bank failures in the past year.
However, the BTFP expired on March 11, 2024. Now, the banking sector faces renewed risks. The end of BTFP will increase banks' borrowing costs. This could potentially lead to tighter credit conditions. Which in turn could push the economy into a recession.
Regional banks are particularly vulnerable. Many are already struggling to maintain profitability. Share prices across the sector have plummeted. Comerica’s price is down 30%. New York Community Bank plunged 40%. First Horizon is even worse: down 43%. The failure of more regional banks could have catastrophic consequences, given their substantial exposure to commercial real estate and other high-risk assets.5
Bank Runs - Hundreds of Banks at Risk
Bank runs always strike fear. When a group of depositors rush to withdraw their funds at the same time, it’s a bank run, or solvency run. This usually happens when depositors fear the bank is on the precipice of shuttering. Many banks hold only a small fraction of customer deposits in reserve. Bank runs cause the bank to use their cash reserves, and they can end up in default.
This is a significant concern in the current environment. Last year's banking crisis saw massive withdrawals from Silicon Valley Bank. This led to its collapse. Another wave of panic withdrawals could be disastrous.6
In a sobering new report, the National Bureau of Economic Research finds that half of all banks are at risk of default. “Our analysis reveals that…CRE distress can induce anywhere from dozens to over 300 mainly smaller regional banks joining the ranks of banks at risk of solvency runs.” Translation: buckle up.6
Protecting Your Wealth: The Case for Gold
Given the heightened risks in the banking sector, it is crucial for individuals to take proactive steps to protect their wealth. One strategy is to diversify investments into physical precious metals, such as gold. Gold has historically served as a hedge against economic instability and inflation. It has provided a reliable store of value in times of crisis.
Investing in a Gold IRA allows individuals to include physical gold in their retirement portfolios. This offers a layer of protection against the potential collapse of the banking system. Gold IRAs are backed by tangible assets. This can help protect investments from the volatility and uncertainties of the financial markets.
Conclusion
The recent collapse of Republic First Bank. Underwater CRE loans and "zombie offices". The ongoing challenges facing the banking sector. These underscore the need for vigilance and prudent financial planning. As the risks of further bank failures and economic recession loom large, investors should consider strategies to safeguard their wealth.
Physical precious metals, such as gold, offer a hedge against the potential fallout from a banking crisis. By including gold in a diversified investment portfolio, individuals can better protect their savings and ensure long-term financial stability. For those concerned about the future of the banking system, exploring the benefits of a Gold IRA may be a prudent step towards securing their financial future.
To learn more about how you can protect your portfolio with a Gold IRA, contact American Hartford Gold today at 800-462-0071. Don't wait until the next bank failure to take action—secure your financial future now.
_______________
Max Baecker is the President of American Hartford Gold (AHG), the nation’s largest retailer of precious metals. He leads American Hartford Gold’s mission to help clients achieve long-term financial security with physical gold and silver.
Under his guidance, American Hartford Gold has delivered billions of dollars’ worth of precious metals to thousands of satisfied clients. He has significantly expanded the AHG workforce and opened a third office in Florida.
Max's dedication to upholding American Hartford Gold's industry-leading standards is reflected in its accolades. American Hartford Gold has made four high ranking appearances on the prestigious Inc. 5000 List of America’s Fastest-Growing Private Companies. AHG holds an A+ Rating from the BBB and a 5-Star Rating on Trustpilot with thousands of 5-star American Hartford Gold reviews. American Hartford Gold is the only precious metals company trusted and recommended by Bill O’Reilly.
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1. https://fortune.com/2024/04/26/philadelphia-bank-implodes-failure/
2. https://www.dailymail.co.uk/yourmoney/banking/article-13324063/commercial-real-estate-foreclosure-banking-crisis.html
3. https://www.businessinsider.com/banks-shadow-lenders-1-trillion-fed-private-credit-hedge-funds-2024-2
4.https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4413799
5.
https://www.retailbankerinternational.com/opinion/are-more-bank-failures-on-the-cards/?cf-view
6. https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.html
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