Starwood Property Trust CEO Barry Sternlicht and a couple of his buddies did some homework recently, and he thinks Federal Reserve Chair Jerome Powell and his staff could have done the same and quickly reached the same conclusion on the effect of the central bank's actions on some banks.
Sternlicht specifically tied the recent failures of Silicon Valley Bank and Signature Bank to the Fed’s interest rate increases. Last week, the central bank announced a ninth hike that increased the benchmark federal funds rate to 4.75% to 5%. In raising rates "they’re just increasing the losses in the regional banks,” he said Thursday in a CNBC interview.
“It’s all their fault,” said Sternlicht. “There are 400 Ph.D.’s at the Federal Reserve. They should have been the first ones to see what they were doing to the regional banks."
By Sternlicht’s own reckoning, more banks are already insolvent on that basis for the same reason.
“This weekend, me and two of my colleagues" reviewed six regional banks, he said, without naming the banks. "And, if you mark to market their securities portfolios, they’re all insolvent.”
The problem, according to Sternlicht, is that federal regulators do not require banks to mark down the value of their securities portfolios. When interest rates rise, the value of bonds decline so the value of securities that banks hold on their balance sheets have dropped as rates have gone higher.
That decline in banks’ securities portfolios, combined with a surge of depositors withdrawing money, contributed to the failures of Silicon Valley Bank and Signature Bank, according to industry analysts.
Sternlicht also warned that the Fed’s rate hikes would affect commercial real estate lending. As weakness in office building demand persists, the values of outstanding commercial mortgages will steadily decline, he said.
That could lead to a chill in regional banks’ origination of new loans for commercial properties, he added.