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The collapse of Silicon Valley Bank earlier this year was likely not an isolated incident, and many other banks may fail, according to a Duke University business school professor.
“The point I’m making is that Silicon Valley Bank was not a one-off,” Campbell Harvey, Duke University professor of finance, told CNBC in an interview on Friday. “There are many banks; indeed, we’ve estimated that perhaps 10% of all banks look pretty similar to SVB. So this is not a one-off, and those long rates going up is punishing.”
“When those commercial real estate loans come in for renegotiation, you watch out,” Harvey added. “The banks would like to renegotiate, but given the level of rates, this will just ripple through the economy in a very negative way.”
Harvey also sees other problems coming down the road for the economy as he believes the Federal Reserve should have stopped raising rates earlier this year.
“Recession at this point is a self-inflicted wound,” Harvey told the business network. “It’s not just the short rate going up so quickly, it’s the long rate.”
Uninversions happened before the last four recessions, but in this current time the long rate has gone up, Harvey explained.
“The long rate is very damaging,” Harvey said. “It increases the cost of capital so it makes it difficult for businesses to invest. It craters the housing market with mortgages all of a sudden at 8%. So this causes implications and indeed our financial system. So our banks are taking a hit right now. You think it was bad in March with SVB and other banks taking a hit because they invested in kind of longer-term instruments. Well, that’s when the long rates were 3.5%. So now they are over 1% higher and we have not realized all of these losses yet. So all of this points to weakness in 2024.”
“When those long rates go up, it really puts the breaks on the economy,” Harvey added.
Harvey said it’s confusing because the GDP print was 4.9%, which is “very good.” He said it’s purely due to consumers working through excess savings from the pandemic.
“Those savings have run out,” Harvey told CNBC. “And you can see it through leading indicators like delinquencies on credit cards and auto loans. Those are going up, which means savings have been depleted. So we cannot count upon the consumer bailing out the economy in 2024 like they did in 2023.”
