Article 43
Thursday, May 04, 2023
The Next Recession Part 34 - More Troubled Banks
“I have full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event. Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out . . . and the reforms that have been put in place means we are not going to do that again.”
- Biden officials say ‘resilient’ banking system can withstand Silicon Valley Bank collapse, Yahoo News, March 10, 2023
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks… The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent.
- FOMC Statement, May 3, 2023
Amid turbulence in the U.S. banking system, nearly half of Americans are anxious about the safety of the money they have in accounts at banks or other financial institutions. A total of 48% of U.S. adults say they are concerned about their money, including 19% who are “very” and 29% who are “moderately” worried. At the same time, 30% are “not too worried” and 20% are “not worried at all.”
- 48% Of Americans Are Worried About Their Money’s Safety In US Banks, More Than During Peak Of 2008 Crisis, ZeroHedge, May 4, 2023
Federal Reserve Chairman Jerome Powell said Wednesday that the financial system is “sound and resilient” following the biggest bank collapse since 2008… The Fed on Wednesday raised interest rates by 0.25 percentage points despite fears that rate hikes are threatening regional banks and boosting the odds of a recession… The decision came less than a week after federal regulators seized First Republic and sold it to JPMorgan Chase after what became the nations second-biggest bank failure… Los Angeles-based PacWest Bancorp’s stock fell 73 percent since early March. Phoenix-based Western Alliance is down 57 percent, Salt Lake City’s Zions Bank is down 49 percent and Dallas-based Comerica is down 43 percent.
- Fed chief says banking system is ‘sound and resilient’ after failures, The Hill May 4, 2023
The bigger worry is that the bank failures might lead to doubts about relatively healthy banks, creating a financial contagion that could impact the wider economy. Averting that scenario was the reason the U.S. put tighter restrictions on major banks following the financial crisis 15 years ago.
- The banking crisis isn’t over. But how bad will it get?, Anchorage Daily News, May 4, 2023---
US banking crisis: Close to 190 banks could collapse, according to study
By Swapna Venugopal Ramaswamy
USA Today
May 4, 2023
With the FAILURE OF THREE REGIONAL BANKS SINCE MARCH, and another one teetering on the brink, will America soon see a cascade of bank failures?
Bloomberg REPORTED WEDNESDAY that San Francisco-based PacWest Bancorp is mulling a sale.
Last week, First Republic Bank became the third bank to collapse, the second-largest bank failure in U.S. history after Washington Mutual, which collapsed in 2008 amid the financial crisis.
After the demise of Silicon Valley Bank and Signature Bank in March, a study on the fragility of the U.S. banking system found that 186 MORE BANKS ARE AT RISK OF FAILUREeven if
only half of their uninsured depositors (uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run) decide to withdraw their funds.
Uninsured deposits are customer deposits greater than the $250,000 FDIC deposit insurance limit.
Why are regional banks failing?
Regional banks are failing because the FEDERAL RESERVE AGGRESSIVE INTEREST RATE HIKES to tamp down inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities.
Most bonds pay a fixed interest rate that becomes attractive when interest rates fall, driving up demand and the price of the bond. On the other hand, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, thus driving down its price.
Many banks increased their holdings of bonds during the pandemic, when deposits were plentiful but LOAN DEMAND AND YIELDS were weak. For many banks, these unrealized losses will stay on paper. But others may face actual losses if they have to sell securities for liquidity or other reasons, according to the Federal Reserve Bank of St. Louis.
“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” economists wrote in a recent paper published on the Social Science Research Network.
A run on these banks could pose a risk to even insured depositors - those with $250,000 or less in the bank - as the FDIC’s deposit insurance fund starts incurring losses, the economists wrote.
Of course, this scenario would play out only if the government did nothing.
“So, our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.
How did Silicon Valley Bank collapse?
In the case of the Santa Clara-based Silicon Valley Bank, which held most of its assets in U.S. government bonds, the market value of its bonds fell when interest rates started going up.
That’s because most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. But when interest rates rise, the lower fixed interest rate paid by a bond is no longer attractive to investors.
The timing coincided with the financial difficulties many of the banks’ customers - largely tech startups - were dealing with, forcing them to withdraw their deposits.
In addition, Silicon Valley Bank had a disproportional share of uninsured funding, with only 1% of banks having higher uninsured leverage, the paper notes. “Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run.”
About the author: Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
---
More Troubled Banks
By Paul Craig Roberts
May 5, 2023
As I reported at the time, the banking crisis is not limited to Silicon Valley Bank. Silicon Valley Banks failure was followed by the failures of New York Signature Bank and First Republic Bank of San Francisco. Now three more banks have had their stock prices collapse - Western Alliance, PacWest Bankcorp, and Metropolitan Bank.
As I have emphasized, the Federal Reserve’s higher interest rates are the cause of the bank troubles. The decade of zero interest rates left banks with portfolios of low interest rate assets on their balance sheets. As the Federal Reserve raised rates, these assets declined in value. Depositors saw that the banks were technically insolvent, and withdrew funds. Others withdrew funds because they can now get higher interest rates from money market funds.
Banks losing deposits are subject to runs. Expecting the worse, shareholders sell their holdings of the banks’ stocks. As the banks lose market value, troubles increase.
The Federal Reserve is causing a banking crisis, because the Federal Reserve imagines that the inflation is a monetary inflation and not an inflation resulting from supply disruptions caused by Covid lockdowns and Russian sanctions. If the Federal Reserve succeeds in throttling the economy with higher interest rates, supply problems are aggravated by reductions in production. In other words, as usual, the Federal Reserves policy is counterproductive.
I have always been amazed that Americans look to government entities for solutions when incompetence is the main attribute of government.
Section Dying America • Section Next Recession, Next Depression •
View (0) comment(s) or add a new one •
Printable view • Link to this article •
Home •
