The banking system's problems may not be over. The collapse of Silicon Valley Bank SIVB, highlighted the interest-rate risk of purchasing long-term securities financed with short-term deposits and the susceptibility to a liquidity run. Banks globally face falling customer deposits (projected to decline in the U.S. by up to 6%) and losses on holding of securities ( (unrealized losses at FDIC insured U.S. banks exceed $600 billion at end of 2022). A 10% loss on bank bond holdings would, if realized, decrease bank shareholder capital by around 25%.

When other interest-sensitive assets are included, one estimate puts the loss for U.S. banks alone at $2 trillion. Globally, the total unrealized loss might be two to three times that. The fact is that higher rates and losses on securities have significantly weakened the global banking system. 

This is before loan losses. Higher rates will affect interest sensitive sectors such as real estate, non-essential consumer industries, and highly leveraged companies. Default rates are projected to rise globally, further reducing earnings and capital buffers.


Second, since the global financial crisis in 2008, regulatory restrictions on traditional banks have shifted higher risk or more complex lending or trading into the shadow banking system -- non-bank financial institutions including insurance companies, pension funds, mutual funds, hedge funds, family offices and specialty financiers. The Bank of International Settlements estimates that $227 trillion was held in these accounts in 2021, almost half the size of the global financial sector and an increase from 42% in 2008.

The trouble is that information about and regulation of these entities is limited. The September 2022 crisis in U.K. government bonds, triggered by liability-driven investing strategies of the British-defined benefit pension plan, highlights the potential risk here.

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