Ex-Fed Pres Kaplan Urges Powell To Pause, Warns 'Bank Pain Is Just Getting Started'
After yesterday's bloodbath, Regional bank stocks tumbled further earlier this morning (before recovering) after former Dallas Fed President Robert Kaplan warns that the US regional banking crisis is far from over...
“I’d prefer to do what’s called the hawkish pause, not raise but signal that we are in a tightening stance, because I actually think the banking situation may well be more serious than we currently understand,” Kaplan, whose career has also included time as a senior executive at Goldman, said in a Bloomberg Television interview.
And now that he's on the outside, urges The Fed to pause its rate hike campaign.
“It is more important to be able to sustain the current rate for an extended period of time, longer than the market thinks, than to get another 25-50 basis points and risk having to cut again. I think that will be very troubling,” said Kaplan, who left the Fed in 2021 after disclosures about his trading activity that drew criticism for potential conflicts of interest.
Funny how that happens once they are on the outside.
Most worryingly, Kaplan went on to claim that bank stocks have been marked down solely because of their over-investment in US Treasuries, while the credit phase, which is “normally more serious,” is yet to unfold.
Kaplan's thoughts coincided with those of Simon White's, Bloomberg macro strategist, who noted this morning that the market was too quick to move on from the widening bank turmoil.
Western Alliance and PacWest’s stock prices have dropped precipitously today, more than many other banks. In Western’s case, what stands out is its relatively high exposure to commercial real estate.
Only M&T Bank and East West Bancorp have a larger relative exposure to CRE of the big banks. PacWest has much less exposure to CRE than many other banks, but negative earnings is likely to be part of the reason for the hit to its share price lately.
However, overall it is the smaller regional banks that have a higher CRE exposure, with the median company in the KBW Regional Bank Index having about 27% of its assets related to CRE, while for the KBW large bank index it is only ~10%.
Smaller banks’ CRE exposure is inflated by business loans collateralized by commercial property. Nevertheless, their exposure is high, and CRE is going through a significant slowdown, with office vacancy rates hitting at least 18-year highs.
It was premature to call an end to the banking turmoil. The Fed will still likely hike Wednesday – not to do so would invite speculation of an imminent rate cut.
Nevertheless, today’s stress is a reminder why it’s highly unlikely the Fed will be able to keep rates higher for longer.