A year after the collapse of Silicon Valley Bank, the International Monetary Fund has warned that US lenders’ continued exposure to risk could spark a new financial crisis.
In its global financial stability notes published on Tuesday, the IMF found that high interest rates and tumbling commercial real estate prices still put US banks at risk of failure.
“The high concentration of CRE [commercial real estate] exposures represents a serious risk to small and large banks amid economic uncertainty and higher interest rates,” the IMF said.
The report specifically mentioned a “weak tail of banks” that are vulnerable because of high interest rates.
SVB and banks within this category had an “exceptionally high concentration of CRE exposures”.
“The turmoil also serves as a stark reminder of the impact that rapidly rising interest rates can have by interacting with underlying financial vulnerabilities,” the IMF said.
The IMF said the episode showed how a group of weak banks can force regulators to enact emergency measures, even if that group of banks is “not individually systemic”.
California-based SVB was one of a number of regional lenders – along with Signature Bank and First Republic Bank – to fail as the Federal Reserve raised its interest rates, which caused the value of long-term Treasuries to fall.
That panic extended into Europe, where UBS acquired rival Credit Suisse in a $3.2 billion takeover.
The IMF blamed the banks’ management for assuming inflation would be transitory, and not managing the interest rate or liquidity risks associated with it.
“The main culprit was the management of the institutions that ended up in distress,” Tobias Adrian, who co-wrote the report, said during an event at the Brookings Institution in Washington.
Mr Adrian said SVB faced “highly concentrated exposures on both the asset side and the liability side” of its asset sheet, pointing to duration and liquidity risk, as well as the lender’s dependence on uninsured deposits.
But federal regulators also hold some responsibility for not flagging the problems faced by SVB sooner, he said.
While the IMF praised the actions taken by the Fed, FDIC and Treasury Department to contain the spread of possible contagion, Mr Adrian said supervisors should have intervened sooner.
A Fed report after SVB’s collapse found weaknesses in the US regulator’s supervision. SVB had 31 unaddressed warnings at the time of its failures, the report said.
“They did see many of the problems but they hesitated to act,” Mr Adrian said.
The Fed has since taken steps strengthen its supervisory role, including reviewing banks whose profiles show higher interest rate and liquidity risk.
It is also monitoring “potential credit deterioration” in commercial real estate.
Updated: March 06, 2024, 6:59 AM
