Chris Whalen: Commercial Real Estate "Trainwreck” Will Hit Banking System, Consumer Credit Is Normalizing, and Interest Rate Cuts Won’t Do Much To Help Banks

Jan 26, 2024

Chris Whalen, financial advisor and founder of Whalen Global Advisors, discusses the challenges in the US banking sector, particularly in commercial real estate. He highlights the impact of COVID, rising interest rates, and potential credit events. Whalen also explores the consequences of interest rate shocks, the importance of risk management for banks, and the proposals of Basel 3. Additionally, he delves into gain on sale accounting, mortgage servicing rights, and the future outlook for the banking sector.

Ask episode

Chapters

Transcript

Episode notes

Introduction

00:00 • 4min

Cracks Forming in Commercial Real Estate

04:06 • 12min

The Impact of an Interest Rate Shock on Banks

16:14 • 4min

Raising Risk Weight on Mortgage-Backed Securities and the Importance of Risk Management for Banks

20:12 • 2min

Crypto Symposium and the Impact of Falling Interest Rates on Banks

21:45 • 3min

Federal Reserve's Interest Rate Cuts and Potential Impact on Banking System

24:34 • 17min

Impact of Basel regulations and proposals of Basel 3

41:29 • 4min

Understanding Gain on Sale Accounting and Mortgage Servicing Rights

45:30 • 20min

Analysis of a Bank and the Future of the Banking Sector

01:05:14 • 3min

Forward Guidance is sponsored by Van Eck. Learn more about the VanEck Morningstar Wide MOAT ETF (MOAT) at https://vaneck.com/MOATFG.

Chris Whalen of Whalen Global Advisors returns to Forward Guidance to share his outlook on the U.S. banking sector for 2024. Whalen argues that consumer and business credit is faring fine, as delinquencies are rising but from ultra-low levels. He does worry that commercial real estate (CRE) loans will continue to suffer impairment as losses are realized in 2024. Whalen notes that while the decline in long-term bond yields since early November 2023 has improved banks’ unrealized losses on held-to-maturity (HTM) securities, and interest rate cuts by the Federal Reserve will not help banks that much as their deposit costs will be slow to fall. Filmed on January 24, 2024.

Follow Chris Whalen on Twitter https://twitter.com/rcwhalen

Follow VanEck on Twitter https://twitter.com/vaneck_us

Follow Jack Farley on Twitter https://twitter.com/JackFarley96

Follow Forward Guidance on Twitter https://twitter.com/ForwardGuidance

Follow Blockworks on Twitter https://twitter.com/Blockworks_

Use code FG10 to get 10% off Blockworks’ Digital Asset Summit in March: https://blockworks.co/event/digital-asset-summit-2024-london

Timestamps:

(00:00) Introduction

(00:31) Troubles In Commercial Real Estate

(07:28) This Will Be A Slow-Motion Train Wreck

(11:01) Consumer Credit Is Normalizing (Delinquencies Are Rising From Very Low Levels)

(16:13) VanEck Ad

(16:57) Updated Views On Banks' Interest Rate Exposure

(24:52) The Fed Is Unlikely To Cut Interest Rates 6 Times This Year, Argues Whalen

(30:13) Fed Will Stop Quantitative Tightening Sooner Than Market Expects

(32:32) Lowest Comfortable Level of Reserves (LCLoR)

(33:49) Discount Window, Standing Repo Facility, and Reverse Repo Facility

(39:00) Medium Term, Short-Term Rates Will Fall and Yield Curve Will Normalize

(41:24) Basel III Endgame

(45:32) Mortgage Servicing Rights (MSRs) and Gain On Sale

(51:42) Net Income Will Likely Fall At Banks - "Don't Look For Roses And Sunshine"

(01:01:04) Private Credit And CLOs

Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.