Bearing Down On Banks

New bank rules will raise borrowing costs and weigh on economic activity.

It’s been more than six months since the failure of Silicon Valley Bank (SVB). Fears of another financial crisis have, thus far, been unrealized. The Federal Reserve and the U.S. Treasury Department deserve great credit for dealing with the situation swiftly and effectively.

Overseers of the industry have been working through lessons learned, and proposing measures designed to prevent a recurrence. The result could be the biggest wave of banking re-regulation since 2010, which would have a substantial influence on the flow of credit through the American economy.

Interest rates are a primary driver of bank performance. They influence the yields earned on loans and the cost of deposits. Higher rates can lead to more credit defaults and limit underwriting revenues. The movement to higher yields diminishes the value of securities that banks hold as sources of liquidity.

Over the past 18 months, interest rates have risen rapidly, more rapidly than expected. Yields on bank assets have increased, but so has the cost of deposits. Banks that failed to pay up aggressively to keep their deposits saw some of them migrate to money funds.

US Bank Trends