The American banking crisis is way worse than the people have been led to believe. The bond market and the commercial real estate market have crashed together and America’s $9 trillion uninsured deposits may be in trouble. In this cyber age, such astonishing amounts of wealth can disappear in one afternoon.
The Federal Reserves tried to describe the second-biggest and the third-biggest banking failure in quick succession as ‘idiosyncratic’. However, this vague comment might be distracting us from an evolving catastrophe in the banking sector.
There are 4800 registered banks in America, and more than half of them could be in trouble, analysts believe. According to Amit Seru, professor and banking expert from Stanford University, thousands of banks might be ‘under water’.
He said “Let’s not pretend that this is just about Silicon Valley Bank and First Republic. A lot of the US banking system is potentially insolvent.”
The US financial system is being tested. It remains to be seen if the economy can deflate the extreme stimulus given during the pandemic years. The mountain of debt acquired now sits, rather ironically, on a cliff edge. The full brunt of Federal Reserve's measures is yet to be felt.
According to the Hoover Institute report authored by Prof Seru, over 2,315 US banks have liabilities greater than their assets. They estimate that the market value of loan portfolios is $2 trillion lower than the value shown in the books.
Repeated overtures to contain depositor panic have failed. The white knight banks tried to restore depositor confidence along with the FDIC at the beginning of the First Republic Crisis. Depositors fled the bank regardless. The $50 billion rescue package offered only hastened the depositors’ exit as it showed the scale of the issue.
The FDIC itself has only $127 billion in assets, which is much lower than the amount it will require to handle a crisis of this scale. It will come as a surprise to no one if the FDIC itself requests a bailout a few months down the line.
PacWest lost 11% of its share price on Monday, 1St May. This is another crisis in the making. The US government insuring all the depositors temporarily does not address the greater solvency issue facing the banks.
Experts are seeing echoes of the 2007-2008 subprime crisis with commercial real estate being at the heart of the current crisis. The total debt of commercial real estate is $5 trillion out of which $1 trillion will mature this year. The property value of commercial real estate assets has fallen by 2% – 5% only so far. It is expected to plummet further.
However, banks like the Silicon Valley Bank that were cautious about the commercial estate trap have also faced issues of solvency. Silicon Valley Bank’s great crime? It depended on the US treasury bonds to secure its depositors. This is supposed to be the safest investment according to economists. Even this failed!
Experts are absolving the banks of the blame and pointing a finger directly at the treasury and Federal Reserve.
Chris Whalen from Institutional Risk Analyst said “The Fed’s excessive open market intervention from 2019 through 2022 was the primary cause of the failure of First Republic as well as Silicon Valley Bank,”
Economists are highlighting the mess created by the Feds and the corner it has beaten itself into. The central bank can either cut interest rates by 100 basis points or wait and watch as insolvency issues hit the mainstream banks. The world’s super central bank can now either let inflation run amok or allow a systemic banking crisis to evolve under its watch. It seems the Federal Reserve is choosing to face a banking crisis.
