It’s that time of year when the country’s largest banks submit their quarterly financial results – J.P. Morgan Chase, Wells Fargo, and Citibank all report on Friday. Many eyes will be on those banks’ lending operations as they attempt to move from recent low interest rates to today’s higher rates. Higher interest rates, unsurprisingly, are hurting banks’ loan businesses.

In reality, as interest rates have risen over the previous 18 months, the mortgage market has nearly imploded.

“It’s just simply unaffordable to get a loan,” said Susan Wachter, a real estate and finance expert at the University of Pennsylvania’s Wharton School.

She reminds out that the crisis has already had an impact on bank balance sheets.

“For many banks, this has been historically a profit center,” she went on to say. “However, it is no longer a profit center.” “This is a loser.”

Banks, according to Wachter, have responded by laying off workers.

However, the collapse is far more severe for non-bank lenders, who supply the vast bulk of mortgages.

“They’re all fighting over a smaller pie,” said Ben Elliott, a Bloomberg Intelligence consumer financials analyst. “So what you’ve seen in the industry is relatively large-scale layoffs.”

High interest rates are also having an impact on commercial real estate finance.

According to Merrill J. Reynolds, a banking industry analyst headquartered in Texas, banks he deals with are seeing reduced demand and borrowers are having difficulty completing payments.

“We’re starting to see delinquencies starting to pick up,” Reynolds went on to say. “And I think they’re going to continue to grow over the next six, 12, 18 months.”

The truth is that, while mortgages and commercial real estate loans are suffering, banks are currently lending more money overall.

According to the FDIC, loan balances were up 4.5% year over year at the end of June.

According to financial risk specialist Mayra Rodriguez Valladares, this is fantastic news for the largest banks.

“All those banks are fine, more than fine, because they have not only the loans of every kind, but they also have asset management, they also have investment banking,” she went on to say.

Rodriguez Valladares sees this as a lesson on the necessity of diversification over focusing on just one topic, which she considers a significant no-no.


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