Image of Nouriel Roubini courtesy of the World Economic Forum.
Nouriel Roubini, the renowned economist who predicted the 2008 financial crisis, has issued a grim assessment of the state of the US banking sector.
Roubini, nicknamed “Doctor Doom” on Wall Street for the dour tone of his predictions, said in an opinion piece for Project Syndicate that the data shows that most US banks are, “technically near insolvency,” and hundreds are already “fully insolvent.”
His comments come just weeks after a wave of bank failures swept across the US, including the collapse of the 16th biggest lender in the nation, Silicon Valley Bank, followed closely by the failure of crypto-focused lender Signature Bank. The stresses spread to Europe, where Switzerland’s second largest lender, Credit Suisse, amid a string of scandals and regulatory failures, saw outflows surge. Fearful of a collapse, the Swiss government stepped in and brokered a deal for the troubled lender to be acquired by its larger rival, UBS.
According to Roubini the decline in the economy following the pandemic aggravated underlying issues in the nation’s financial system, and that has left many lenders on shaky ground.
He emphasized that the present circumstances were precipitated by additional factors, such as the high level of debt held by households and businesses, as well as the overinflated values of assets such as stocks and real estate.
Roubini also added that some of the blame rests with the US Federal Reserve, which placed additional pressure on the profitability of lenders by squeezing the spread between the interest they derive from loans, compared to the interest they need to pay out to depositors.
These pressures forced lenders to take greater risks as they attempted to draw out more profits, as constant rate-hiking increased their vulnerability to potential losses.
In the last 12 months, the US Federal Reserve has increased its benchmark interest rate from near-zero to 4.75%-5%, the highest level seen since 2006.
As it has done so, low-yielding bonds purchased by lenders when interest rates were low have depreciated, producing unrealized losses on the balance sheets of many institutions. However any sudden rush to withdraw deposits could force those losses to become realized, and place many lenders in tenuous positions.
