Key problem arises when a sufficient number of depositors lose confidence in their banks and start to withdraw funds. These actions of withdrawing funds can turn into a self-fulfilling prophecy and exacerbate a bank run. Ultimately, the survival of banks is determined not by their fundamental strength, but by the perceived safety among the masses who entrust them with their funds.
As banks seek to bolster their deposits, they face heightened competition for cash. Rising interest rates are making bonds, money market funds and other investments a more lucrative place for individuals and businesses to store their money. Meanwhile, banks also face a risk of impending regulatory overhaul.
Looming commercial real estate issues
The exposure to commercial real estate is one of the other worries that is keeping bank stocks under pressure, and can highlight which other banks may be at risk. Recently, Charlie Munger, Berkshire Hathaway vice-chair, has warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall. The office segment is a particular source of risk, given the increasing remote and hybrid working options. Rising borrowing costs are also squeezing property owners, complicating the financing for many buildings. If these developers default on their debt, that could be a big blow to the US lenders exposed, and will have a more direct and quick ripple effect on the credit extension by the banks to the economy.