Since March 10, three large commercial U.S. banks have failed. The fallout, paired with trends that have already been happening, are being described as a “crisis” by many in the financial community, including Thomas Albrecht, CRO and CFO of Reliance Partners.
On Monday’s episode of WHAT THE TRUCK!?! Albrecht joined Dooner to discuss how the current banking troubles could affect the freight community and warn that the situation is more serious than many think. In short, it could affect a company’s ability to secure and pay back loans, worsening the scenario for the freight industry, which is already plagued by low volumes and rates.
Even before the first bank collapse, deposits at commercial U.S. banks were falling; due to low returns, many depositors have been moving their dollars out of banks to money market funds in search of higher yields. Unrealized losses were also up before the bank failures, with a recent Federal Reserve survey of 722 banks showing unrealized losses were 50% of their entire capital base at the end of the third quarter of 2022.
“Unrealized losses, a more cautious environment, deposits leaving commercial banks, all of this means that loan activity is going to be very disappointing,” Albrecht said. “That, in turn, is going to have a huge negative impact on freight creation in the second half of the year.”
Ultimately, fewer deposits mean banks have less bandwidth to lend money, and in theory, this means smaller and fewer loans are available. This could spell trouble for truckers and carriers that rely on loans to help fund essential business assets, like their commercial trucks, trailers or technologies.
Those who can get loans are likely to pay more in interest rates, as the Fed has raised rates to the highest they’ve been in 16 years in an effort to battle inflation. This could eventually make its way to borrowers, meaning trucking companies could have a harder time getting essential funding and paying back loans, increasing the likelihood of stalled growth, potential job cuts or even closures.
Albrecht noted that he has already seen since the start of the year businesses shutting their doors, especially among smaller companies.
So what will happen next?
Two possible unfavorable scenarios could come from the Fed’s response to the current situation, which Albrecht laid out: “If the Fed ends up reversing course and cuts interest rates, then they won’t have finished their job on [fighting] inflation, so wages will continue to trail inflation. If the Fed holds tight, and doesn’t reduce rates, then all of these unrealized losses …. will have to be dealt with, so there’s going to be cautiousness throughout the system, and it’s just not going to be a good environment for freight demand to materially reaccelerate.”
Albrecht urged the trucking industry to pay attention to headlines around the commercial banking industry and finance, likening the period we’re in now to the “quiet before the next financial storm.”
“I don’t want to sound like I’m preaching Armageddon, that’s not what I’m trying to say, but this is not just a classic boom-and-bust freight recession,” Albrecht said. “There’s some dynamics in the financial system that have to work their way through. It’s going to take the rest of this year, maybe the spring of next year, before freight starts to feel better.”
As a trucking insurance agency, Reliance Partners’ 100-plus agents can help companies with their risk and insurance strategies and connect freight businesses with insurance plans that fit their businesses’ needs.
“We are a very different insurance agency. Much of our management worked in the world of freight, and we haven’t spent our whole careers in insurance. We love to chat about the trucking market at large,” Albrecht said.