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The collapse of Silicon Valley Bank earlier this year was probably not an isolated incident, and many other banks could fail, according to a Duke University business school professor.
“What I mean is that Silicon Valley Bank was not exceptional,” said Campbell Harvey, a finance professor at Duke University, he told CNBC in an interview on Friday. “There are many banks; in fact, we have estimated that perhaps 10% of all banks are quite similar to SVB. So this is not an isolated case, and the increase in long-term rates is a punishment.”
“When those commercial real estate loans come to be renegotiated, you have to be careful,” Harvey added. “The banks would like to renegotiate, but given the level of rates, this will only have very negative repercussions on the economy.”
Harvey also sees other problems looming for the economy, as he believes the Federal Reserve should have stopped raising rates earlier this year.
“The recession right now is a self-inflicted wound,” Harvey told the business network. “It’s not just that the short-term interest rate is rising so quickly, but also the long-term interest rate.”
Divestitures occurred before the last four recessions, but now the long-term interest rate has risen, Harvey explained.
“The long-term interest rate is very damaging,” Harvey said. “It increases the cost of capital, so it makes it difficult for companies to invest. Suddenly, it collapses the real estate market with mortgages of 8%. This has implications and, indeed, our financial system. So our banks are suffering a hard bang”. Now. One thinks that March was bad, since the SVB and other banks took a hit because they invested in longer-term instruments. Well, that’s when long-term rates were 3.5%. So now they are more than 1% higher and we have “We haven’t realized all these losses yet. So this all points to weakness in 2024.”
“When those long-term rates go up, it really puts a damper on the economy,” Harvey added.
Harvey said it’s confusing because the GDP figure was 4.9%, which is “very good.” He said it is solely because consumers have taken advantage of excess savings due to the pandemic.
“Those savings have been exhausted,” Harvey told CNBC. “And you can see it through leading indicators like credit card and auto loan delinquencies. They’re rising, which means savings have been depleted. So we can’t count on the consumer to bail out the economy in 2024 like “he did it in 2023.”
