Data compiled April 5, 2023. A = actual, P = predicted. Figures for the federal funds rate through 2026 are based on a four-quarter average of estimates provided by IHS Markit, now part of S&P Global. Actual reported figures used when available. Sources: S&P Global Market Intelligence; IHS Markit, proprietary estimates. ©2023 S&P Global Market Intelligence. All rights reserved. Earnings Effects The upshot of the March tumult is that it appears to be an earnings issue for banks rather than a “safety and soundness issue,” Stovall said. Liquidity is largely stable at most banks, though funding costs have gone up as money has moved into higher-cost certificates of deposit (CDs). Earnings will feel the squeeze, as they are expected to fall by 18% in 2023 as higher funding costs pressure net interest margins, according to Stovall. See Figure 1. Commercial Real Estate The depth and breadth of the forecast recession will be impacted by what happens in the commercial real estate sector. The office sector is trading at a 53.1% discount to net asset value, which implies that the market is predicting “big haircuts,” Stovall said. He noted that the current situation is due in part to preferential shifts by workers in the post-pandemic world and higher rates, rather than bad practices like highly leveraged banks and lax regulation. Varvares’ team modeled a scenario in which CRE prices fall 15%, which led to the economy falling into a mild recession of “less than a 1% decline peak-to-trough in the second half” of the year, he said, adding that the CRE declines would have big balance sheet effects on banks and insurance companies. M&A Slowdown With respect to bank M&A, Stovall said the first quarter was about as slow as “we’ve ever seen,” trailing only the second quarter of 2020 at the start of the pandemic. Legislators and regulators are expected to respond to the March turmoil with increased regulation, which could “ultimately encourage activity,” he said. “Specifically, some of the old measures for large regional banks that were wiped away during the Trump administration could be reimplemented, including the liquidity coverage ratio, macroprudential standards and living wills, as well as new rules pertaining to uninsured deposit levels and deposits highly concentrated in one industry,” Stovall said. w FIGURE 1. 21 THE ARIZONA BANKER
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