“All it takes is one bad news story about any of these banks, and we could have another banking crisis like we had in March of [2023],” Cole, who has served as a special adviser to the International Monetary Fund and World Bank, told Fortune. “I’m amazed we haven’t had one since then.”
There’s an easy explanation for the chart above: When long-term interest rates spike, the value of assets like similarly long-dated U.S. debt or residential mortgage-backed securities declines.
At that level, the banking system starts “seeing serious problems,” Amit Seru, a finance professor at the Stanford Graduate School of Business, said in an email statement to Fortune.
“It becomes quite bad at 5%,” added Seru, a senior fellow at the university’s Hoover Institution, a conservative-leaning think tank.
Cole said that would equate to roughly $600 billion to $700 billion in unrealized investment losses.
However, if lenders are forced to offload some of those investments, Cole said, then the entire portfolio must be marked to market. That means these technically liquid assets become, for the banks’ purposes, exactly the opposite.
“It’s like a rock hanging over the neck of the banks,” Cole said.
“Three days later, they were closed,” Cole said.
In search of a bit more upside, banks looked further down the yield curve, pumping more than $2 trillion into investment securities like long-term U.S. Treasuries (considered “risk-free” assets, if held to full repayment), mortgage-backed securities, and similar assets.
Despite Fed intervention to make uninsured depositors whole and the acquisitions of both banks, the scars of the crisis and its ripple effects still linger.
SVB’s fragility snuck up on regulators. They’ve since become much more attuned to problems related to interest-rate risk and depositor flight, Seru said. But many of the core issues persist, he added, as capital requirements still largely ignore unrealized losses on securities and loans, while hedging strategies remain limited across much of the banking system.
“So while we may not see another crisis exactly like SVB’s, the ingredients for stress are still present—especially if macroeconomic conditions deteriorate,” Seru wrote.
And as long as interest rates remain high, losses banks accumulated during the crisis are still hanging around.
Cole, meanwhile, said he sees additional pressure coming from a looming crisis in commercial real estate, leaving banks increasingly vulnerable if investment losses put them under pressure. He said he’s especially worried about regional and super-regional banks with $10 billion to $200 billion in assets, many of which are public companies with major exposure to depositors with holdings above the FDIC’s $250,000 limit for insurance.
“They can’t meet one of those runs if they have any unrealized losses on their securities portfolio,” Cole said. “Then they’ll have to mark that to market, and the regulators will close them.”
In short, banks face a “nightmare scenario” and are sitting on a “tinderbox.”
“And it’s just going to take one spark,” Cole said.
