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October 2022

Miscellanea

By Jhankhana Thakkar | Chirag Chauhan
Chartered Accountants
Reading Time 8 mins
I. ECONOMY – US MARKETS

20 Banks head into a perfect storm – A repeat of the 2008-09 Crisis?

After enjoying a couple of years of tailwinds, U.S. banks are heading into a perfect storm, fueled by a collapse in mortgage originations and an inverted yield as interest rates rise. And it will squeeze both bank revenues and earnings.

A Collapse in Mortgage Originations

Mortgage originations are a big business for traditional banks. They allow them to collect origination fees, discount points, closing costs and loan service fees, which boost their top and bottom lines.

But mortgage originations are susceptible to interest rate fluctuations. They rise as interest rates fall and drop as interest rates rise. For instance, in 2020, when the 30-year mortgage rate declined to a record low of 2.80%, mortgage originations soared from $601 billion to $1.36 trillion. But mortgage originations have recently collapsed to $677 billion, as mortgage rates climbed to 6.43%. And the worst may have yet to come as new and existing home sales are plunging, and homeowners see no reason to refinance loans at higher mortgage rates.

Then there’s the inverting of the yield curve, which makes matters worse.

Inverted Yield Curve

A rising interest environment is usually good for banks, provided that long-term interest rates rise faster
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