Navigating the Storm

Rising Interest Rates and Their Ripple Effects

Smaller regional banks play a pivotal role in our financial system as they hold the lion’s share of commercial real estate loans. However, most of these loans are approaching maturity, and there lies the challenge. Unlike residential mortgages, commercial mortgages are deemed riskier and often structured differently because of this. Now, picture an economy where interest rates surge with increasing speed making it almost impossible to refinance these maturing loans. This is a scenario that spells trouble for companies and banks burdened with commercial loans.

I heard stories from two separate cities that had commercial buildings recently sell for a mere less than 3% of their former value a decade or two ago. These companies and banks face an uphill battle as more people shop online, work from home offices, and now we have a relentless rise in interest rates. This makes refinancing these loans extremely difficult, putting the fate of our regional banks at risk.

But the drama doesn’t end there.

Credit unions, our unsung heroes of everyday banking, find themselves at a crossroads as well since the majority of loans they hold are auto loans. With the deflationary auto industry, increased inflation on necessities, and increased interest rates, how many auto loans will buckle under this strain? What fate awaits our smaller credit unions if there are a lot of auto loan defaults? While we almost need a bank account to function in our modern everyday lives, the very institutions we entrust to safeguard our money could be at risk. The bigger banks may swallow up these small regional banks and credit unions making it easier for them to push their monetary policies onto the people. And, as I’ve been shouting before, this could be the moment when governments usher in their central bank digital currencies (CBDCs).

Now is not the time to be scared but to be prepared. 

Let me know your thoughts. What do you think about CBDCs? How are you preparing your finances to weather this potential storm?

If you want to understand more about CBDCs and how they may differ from cryptocurrencies, check out my Cryptocurrency page.

If you are looking for some ideas to help you get started preparing your finances and household, check out my Lessons of 2020 page.