Scary Financial News: Actions to Take Now

Two down, six to go, Federal Reserve policy meetings, that is. Hopefully the remaining confabs are a little less anxiety-provoking than the most recent one. Fearing inflation more than banking sector pressure, the Fed decided to raise short-term interest rates by a quarter of a percentage point to a range of 4.75-5 percent. Whether or not you agree with the decision, the central bank continued to pursue one of the most aggressive rate hike campaigns since the early 1980’s.

In an attempt to calm investors and depositors after two U.S. banks and one Swiss bank failed, the Fed noted “the U.S. banking system is sound and resilient.” While the system as a whole remains strong, anxiety remains high. During the week, investors sold shares in Deutsche Bank, seen as the next problem child of the European banking system and First Republic Bank, the next U.S. regional bank with a large share of uninsured deposits.

What does the deluge of scary headlines mean for you, and what actions should you be taking to protect yourself?

Fed Rate Hike: The central bank’s rate increase underscores what borrowers already know: it costs a lot to service credit card balances, adjustable-rate mortgages, some small business loans and to buy a car with an auto loan. Conversely, savers will continue to be rewarded with solid interest on savings, checking, CDs, and money market accounts.

ACTION ITEMS: Aggressively pay down variable debt and try to avoid assuming more of the same. Seek high interest from online aggregation sites like DepositAccounts.com and Bankrate.com.

Recession Fears: The Fed said that recent banking problems “are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.” Here’s why: when banks are spooked, they usually pull back on lending, which means that individuals and businesses borrow, and importantly, spend less. A reduction in spending would slow economic growth, which in turn could dent the labor market. On the plus side, a reduction in activity could help dampen prices. Of course, the Fed likes to cover itself by reiterating that “the extent of these effects is uncertain.”

ACTION ITEMS: Beef up emergency reserve funds so that you can cover 6-12 months’ worth of living expenses.

More Bank Failures: There are almost 4,000 banks and another 4,700 credit unions in the U.S. and every year, some of these institutions fail. However, when there is aggressive Federal Reserve rate tightening, the number of failures usually increases. For people of a certain age, you may be worried that we are about to see another Savings and Loan (S&L) crisis, a period that began in the mid-1980’s and ultimately saw the collapse of about 1,000 small banking institutions that had grown enormously after a period of federal deregulation. In its analysis of the S&L crisis, the FDIC said that before the 1980s, savings and loan associations had limited powers and relatively few failures, but “the free-market philosophy of the Reagan administration” encouraged a reduction in regulation and supervision.

While we are not likely to see a repeat of the S&L crisis, there is surely going to be consolidation in the banking sector, especially among the mid-sized regional banks like SVB and Signature, which are likely to face steeper regulatory hurdles. Fewer banks could mean somewhat diminished access to loans and service for consumers.

ACTION ITEMS: Bank with institutions that carry FDIC insurance (or NCUA insurance if you are with a credit union) and keep balances under $250,000.

Real Estate is Next: You will undoubtedly begin seeing headlines that say “Commercial real estate is the next shoe to drop!” The reason for the concern is that if banks, especially smaller institutions, pull back on lending, it could negatively impact commercial real estate. Small banks have a large share of exposure to commercial real estate. According to Paul Ashworth of Capital Economics, they “provide the lion’s share of funding,” with “$1.9 trillion in commercial real estate loans outstanding, more than double the $0.9 trillion extended by the big banks.”

When asked about the risk to commercial real estate during the Fed press conference, Chair Powell shooed away the concerns: “we’re well aware of the concentrations people have in commercial real estate.” Given the fact that commercial real estate was already under pressure due to post-pandemic shifts, Ashworth sees a “a growing downside risk” that could put pressure on both small banks and commercial real estate.

ACTION ITEMS: None, but try not to make yourself nuts about a potential outcome over which you have no control!