'Shark Tank's' Kevin O'Leary Says Rising Rates Are Killing Regional Banks: 'We've Started To See The Cracks'

The Federal Reserve hiked the fed funds rate by 25 basis points to a 22-year high of 5.25%-5.50% last week. In response, “Shark Tank's” Kevin O'Leary warned of serious repercussions arising out of the central bank's aggressive rate hikes.

What Happened: The Fed's hawkish stance will break down regional banks, which support about 60% of the economy, said Kevin O'Leary in an interview with CNBC Street Signs Asia on Thursday.

The rapid rise in the cost of capital is “killing them on their real estate loans,” he said.

“You keep squeezing the toothpaste tube, you keep rolling it up, you keep raising rates, and you know things are going to break, you just don't know when and where,” O'Leary said.

Unlike the market, which has priced in a pause and potentially a pivot, the entrepreneur expects the Fed to hand down more rate hikes.

"Terminal rate, where the Fed stops, could be 6.25, could be 6.50. So you've really got to think about this if you think about the long-term and the short-term effect,” he said.

“We've started to see the cracks, the Titanic has not [sunk],” he added.

See Also: Best Inflation Stocks

Why It's Important: The regional banking crisis, which led to the collapse of a handful of small- to mid-size banks, has been seen as an outcome of the Fed's relentless rate hikes.

The banks invested in long-dated Treasury securities and, as the yield curve inverted, the value of the investments eroded. The banks were left with no option but to raise capital to shore up liquidity, in turn leading to bank runs.

Silicon Valley Bank, First Republic Bank FRCB and Silvergate were among the collapsed banks that were placed under Federal Deposit Insurance Corporation (FDIC) conservatorship.

The futures market is currently pricing in an 80% probability of a Fed pause at the September meeting. Given that Fed Chair Jerome Powell has signaled that future rates could depend on incoming data, inflation could be the key variable that could sway the central bank.

The SPDR S&P Regional Banking ETF KRE, an exchange-traded fund tracking performances of regional banking stocks, ended Friday’s session up 1.44% at $48.72, according to Benzinga Pro data. The index is down about 15% so far this year.

Read Next: Fed Raises Interest Rates To 5.5%, The Highest Since Early 2001

Photo: Shutterstock