The collapse of Silicon Valley Bank earlier this year was not an isolated incident, and many banks are likely to fail, according to a Duke University business school professor.
“The point I’m making is that there is no Silicon Valley bank Once,” Campbell Harvey, Duke University finance professor, told CNBC In an interview on Friday. “There are many banks; in fact, we estimate that 10% of all banks may look like SVB. So this is not a one-off, and the long-term increase in fees is punitive.”
“When it comes to renegotiating those commercial real estate loans, you have to watch out,” Harvey added. “Banks want to renegotiate, but given the level of rates, it will ripple through the economy in a very negative way.”
Harvey also sees other issues on the way for the economy, as he believes the Federal Reserve should have stopped raising rates earlier this year.
“The recession is a self-inflicted wound at this point,” Harvey told Business Network. “It’s not just the short rate that’s rising very quickly, it’s the long rate as well.”
Reversals have occurred before the last four recessions, but the long rate has risen this time, Harvey explained.
“The long ratio is very harmful,” Harvey said. “It increases the cost of capital, so it makes it harder for businesses to invest. It causes a sudden dent in the housing market with 8% mortgages. So it has implications and indeed our financial system. So our banks win. Because SVB and other banks invested in long-term instruments, in March You think that was bad. Well, that’s when long-term rates were 3.5%. So now they’re over 1%. All of these losses haven’t been felt yet. So it all points to weakness in 2024.”
“When those long rates go up, it really puts a dent in the economy,” Harvey added.
Harvey said this was puzzling as the GDP print was 4.9%, which was “very good”. He attributed this entirely to consumers working through excess savings from the pandemic.
“Those savings are exhausted,” Harvey told CNBC. “You can see that with leading indicators like delinquencies on credit cards and auto loans. They’re going up, which means savings are down. So we can’t count on the consumer economy to recover in 2024 like it did in 2023.”