In an open-editorial published on MarketWatch, economist Nouriel Roubini, also known as “Dr. Doom,” expressed his concerns about the banking sector in the United States.
Roubini stated that most U.S. banks are technically near insolvency, and hundreds are already fully insolvent. He argued that banks in America carry unrealised losses on securities amounting to $620 billion and that higher interest rates have reduced the market value of banks’ other assets, making matters worse.
In light of this factor, Roubini says that U.S. banks’ unrealised losses actually amount to $1.75 trillion, or 80% of their capital.
He emphasised that the “unrealised” nature of these losses is merely an artifact of the current regulatory regime, which allows banks to value securities and loans at their face value rather than their true market value.
Roubini expressed his concern that depositors can sense deterioration in deposit safety, leading to a loss of trust. If depositors flee, the deposit franchise evaporates, and the unrealized losses on securities become realized, making bankruptcy unavoidable.
He also believes that the U.S. economy may face a harder landing due to the credit crunch caused by banking stress, referring to it as a “house of cards.”
Regional banks, which are vital for financing small and medium-sized businesses and households, are particularly affected, according to Roubini.
The world’s central banks face not just a dilemma but a trilemma, as interest rate hikes aimed at achieving price stability may result in a recession and higher unemployment while also increasing the risk of severe financial instability.
Roubini argued that the trilemma of challenges is compounded by negative aggregate supply shocks such as the Covid-19 pandemic and the war in Ukraine.
A severe recession is the only thing that can temper price and wage inflation, but it will make the debt crisis more severe, and that in turn will feed back into an even deeper economic downturn.
Since liquidity support cannot prevent this systemic doom loop, everyone should be preparing for the coming stagflationary debt crisis.
Roubini’s op-ed highlights the urgent need for regulatory reforms to address the underlying issues in the U.S. banking system. The banking sector’s problems are not just limited to the United States, as similar issues are present in other countries worldwide. It is crucial to address these problems to prevent the next financial crisis from occurring.
Banking Crisis
In Summary economist Nouriel Roubini raised serious concerns about the state of the U.S. banking sector. He highlighted the significant unrealized losses on securities carried by American banks and argued that most are technically near insolvency, with hundreds already fully insolvent.
Roubini also suggested the potential for a loss of trust in deposit safety and the resultant bankruptcy of banks. The article emphasizes the urgent need for regulatory reforms to address the underlying issues in the U.S. banking system and prevent the next financial crisis from occurring.