Pressure is building on regional banks, commercial real estate developers, and small businesses, Kevin O’Leary has warned.
“It’s getting worse by the week,” the “Shark Tank” investor told Fox Business on Friday. “Lots of private equity firms are admitting there’s cracks in the system.”
The Federal Reserve has hiked interest rates from nearly zero to north of 5% over the last 18 months, in a bid to cool inflation which hit a 40-year high of over 9% last summer. Steeper borrowing costs have pulled down the value of commercial properties and weighed on debt-reliant developers, fueling a credit crunch as banks balk at lending to the sector.
Regional banks in particular are feeling the squeeze, as they’re the main lenders to the CRE space, and have seen the value of the real estate and bonds on their balance sheets tumble as rates have climbed. Smaller banks are also a key source of financing for small businesses, which are weathering a painful period of stubborn inflation, costlier debt, and lingering fears of a recession.
“We’re going to see more cracks in regional banks, and that’s putting pressure on the loan books of those banks which are hitting small business,” O’Leary said.
Many CRE developers face the prospect of refinancing their loans within the next three years at interest rates of 9% to 14% a year, compared to between 3% and 5% when they first borrowed the cash, the celebrity investor said.
“That makes these buildings uneconomic,” he noted, underscoring that the pain in the CRE sector would have knock-on effects on regional banks and small businesses.
O’Leary – whose nickname is “Mr. Wonderful” — cautioned that if banks run into trouble, businesses with over $250,000 in their payroll accounts might pull their money out en masse, or be left unable to pay their employees. The Federal Deposit Insurance Corp. only guarantees a maximum of $250,000 per account holder at any one bank if the lender becomes insolvent.
“You don’t want a regional bank failing because you can’t past $250,000 guarantee it,” O’Leary said, adding that many payroll accounts have well over $250,000 in them ahead of payday.
The founder of O’Leary Funds and O’Leary Ventures urged lawmakers to support a $100 million guarantee for non-interest-bearing accounts, which would protect payroll accounts.
“They’ve got to have some plan for when these banks start failing,” he said.
O’Leary has recently touted the S&P 500 given the tailwind of aggressive government spending, sounded the alarm on the triple threat facing the US economy, and warned mortgage rates could surge past 8% if the Fed lifts rates to north of 6%.
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