"Concerns Over U.S. AI Bubble and Regional Bank Instability Are Overblown"

Unlike the IT Bubble, AI Companies Are Profitable and Investment Continues
Regional Bank Instability: Low Likelihood of a 2023 SVB-Style Crisis

Concerns have been raised about a potential artificial intelligence (AI) bubble and the instability of U.S. regional banks amid the relentless rise of the U.S. stock market. In fact, the so-called "fear index," the VIX, has surpassed the critical threshold of 20. The VIX measures the 30-day expected volatility of the S&P 500 Index, and when it exceeds 20, it tends to exhibit volatility clustering, where price swings accelerate.

On October 21, Hana Securities released a report titled "Two Controversies (AI Bubble and U.S. Regional Bank Instability)," analyzing that worries over an AI bubble and regional bank instability are unlikely to materialize.

AI Bubble Debate: M7 Companies Are More Profitable Than During the IT Bubble

Hana Securities compared the current situation to the bursting of the IT bubble in the early 2000s. The collapse of the IT bubble and the subsequent recession were largely due to reckless investment financed by borrowing, in a context where corporate profit growth was not confirmed. At that time, the average net debt ratio of leading companies that drove the stock market was -9.6%. However, as of the second quarter, the average net debt ratio of the current leading companies known as the M7 is -17.7%. This means that companies leading the AI boom are generating more profits and holding more cash and cash equivalents than their IT bubble-era counterparts.

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The macroeconomic contribution is also different. If we sum up the fixed investments in the U.S. national accounts that are closely related to AI-such as structures, information processing, and intellectual property investments-the contribution of IT investment to GDP growth before the IT bubble was on average 1 percentage point. After the IT bubble burst, the contribution turned negative at -0.15 percentage points. In contrast, the current contribution of AI investment to GDP growth is 0.5 percentage points. Kim Dooun, an analyst at Hana Securities, stated, "Unlike during the IT bubble, current AI companies are profitable, and AI investment is expected to expand further," adding, "It is still too early to talk about an AI bubble."

Regional Bank Instability: Low Risk of Contagion

There are concerns that the instability of U.S. regional banks could lead to a repeat of the 2023 Silicon Valley Bank (SVB) crisis. The SVB incident was triggered by unrealized losses in bond portfolios and poor management of interest rate and liquidity risks, which led to a bank run. In contrast, the current instability among regional banks is primarily due to bad loans to non-depository financial institutions (NDFIs), high loss rates on collateralized loans, and rapid credit deterioration.

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Since the beginning of this year, the main source of credit creation has shifted from banks to non-depository financial institutions such as private equity funds. As of mid-October, the volume of such loans exceeded $1.6 trillion, and loans from non-depository financial institutions have rapidly expanded to nearly 7% of total bank assets, which is certainly a burden. As a result, the share prices of some bank stocks have plummeted.

Hana Securities, however, assessed that the risk of contagion remains low. Analyst Kim Dooun explained, "You can see this in the market response; for example, the share price of JPMorgan Chase, the leading bank stock, is on an upward trend." He added, "A key point to watch is that this situation, which has arisen amid efforts by a potential second Trump administration to ease banking regulations (such as Basel III relaxation and reduced CFPB oversight), could trigger pushback from the Democratic Party and regulatory authorities, increasing the likelihood of delayed or reconsidered deregulation policies."

Meanwhile, it is also important to note that the current period is one of interest rate cuts and liquidity expansion, which is a key difference from 2023. The Federal Reserve has stated that it is continuously monitoring the market to prevent a sudden liquidity crunch like the one that occurred after the end of quantitative tightening (QT) in 2019. The central bank is also preparing a buffer through the Standing Repo Facility (SRF) to respond to unexpected liquidity demands.

This content was produced with the assistance of AI translation services.