Barry Sternlicht, the billionaire boss of Starwood Capital, is sounding the alarm. He’s predicting a U.S. bank could go under every week. Why? It’s the killer combo of rising interest rates and stubborn inflation biting into over 4,000 U.S. banks.
Weekly Warnings for Regional Banks
In a candid chat with CNBC, Sternlicht zeroed in on smaller community and regional banks. These guys are on thin ice, he says, facing what he calls “a treacherous time.” His grim forecast? “Every week, maybe two a week,” a bank might just collapse. He sees trouble brewing and expects the cracks to show, with failures becoming a regular scene.
This isn’t just talk. The U.S. has been wrestling with a shaky economy all year long. The Federal Reserve has been jacking up rates for two years to fight inflation but hasn’t eased up yet. Many think this stubborn high-rate policy spells danger for the economy, and Sternlicht is one of them.
The First Domino Falls
Take the collapse of First Republic Bank in 2023. This Northeast regional lender had about $6 billion in assets and $4 billion in deposits. It wasn’t just any bank—it was the first to fall under the weight of these high rates, especially with its big real estate holdings. Sternlicht had warned about this, saying way back in 2022 that a recession was coming because the U.S. had started tightening the money taps.
But there’s more than just interest rates shaking up the banks. The Federal Reserve’s latest report throws climate change into the mix. They ran a scenario last year to see how banks would handle the financial risks from natural disasters or policy changes due to climate change. Turns out, many banks are not fully ready. They might need help from third parties to fill in their data gaps.
Banks like Bank of America, Citigroup, and Goldman Sachs were part of this exercise. The Fed’s conclusion? Climate risks could cost the banking sector trillions in assets and threaten their stability. However, they’re not making any immediate demands on banks’ capital because of these findings.
U.S. and the Global Shifts in Banking Policy
Jerome Powell, the chair of the Federal Reserve, made it clear. The U.S. isn’t going to use banking policy to set climate goals. They’re all about managing risks, not pushing environmental targets. This is a sharp contrast to what’s happening in Europe. The European Central Bank and the Bank of England are nudging banks to gear up for the energy transition, pushing them to manage climate risks more proactively.
“The exercise was exploratory in nature and does not have capital consequences. Drawing on lessons learned from the exercise, the Board will continue to engage with participating banks regarding their capacity to measure and manage climate-related financial risks.“
Federal Reserve
And while the Fed isn’t giving out specific numbers on potential losses, a leaked Citigroup document shows a possible minor hit from these climate scenarios. So, while the threat is big, the immediate impact might not be as severe.
