BT, MAY 16, 2023
The wave of US bank runs that began with Silicon Valley Bank’s digital customer deluge in March is still wiping out small and mid-sized banks, and strategists say it can only end in recession or government intervention.
American banks are still falling like dominoes – even if those dominoes are currently getting smaller – with the US$200 billion First Republic Bank the most recent to drop, and the US$41 billion PacWest Bancorp next in line.
Beverly Hills lender PacWest Bancorp’s Securities and Exchange Commission recently alerted regulators to the fact that its deposits were depleted by almost 10%, or about US$1.8 billion, in the space of the week up to May 5. It attributed the reason to “heightened market and customer fears of additional bank failures.”
Bank runs are the economic and psychological equivalent of the Covid 19 pandemic. Once the contagion is loose, it will take vast financial and intellectual resources to stop it from spreading.
The scale of this year’s banking crisis may not be comparable to the 2008 near-annihilation of the global financial system, but it has the same deep-seated psychological roots, which are notoriously hard to uproot.
When bank investors and clients see their peers wiped out in a bank run as happened in 2008 at Bear Stearns and this year at Silicon Valley Bank, they justifiably fear for the safety of their own money.
Investors and depositors alike yanked their money out of First Republic, as the bank disclosed days before it was seized by regulators and sold to JPMorgan Chase on Apr 30.
Like what happened in 2008, the only way to stop this psychological contagion spreading would be a show of overwhelming force from regulators.
Back then, the US Treasury pumped billions of dollars into ailing Wall Street banks. This time around, the Federal Deposit Insurance Corporation would have to expand its backstops to all depositors to make everyone feel safe.
Among the dominoes that preceded First Republic were Silicon Valley Bank, Signature Bank and Credit Suisse Group. All shared certain characteristics, catering to extremely wealthy – and, it turned out, extremely fickle – clients and carrying Treasury bonds on their balance sheets.
The only domino that did not tumble was Deutsche Bank, which was more diversified in its business lines and its balance sheet.
As in 2008, there is a high risk that the banking crisis will feed back into the economy. Regional banks are not systemically important, as Credit Suisse and Lehman Brothers were, as individuals.
These banks are the very essence of the modern financial system, however. The banking system was built around lenders steeped in the social and economic dynamics of their town or state.
The only consolation for the bulls is that the banking crisis is still relatively small scale. By some measures, the banks that were brought to the verge of failure in the 2008 financial crisis were holding trillions of dollars in assets.
Citigroup, which was to all intents and purposes a zombie by the time regulators swooped in to take it over, was about five times as large as Silicon Valley Bank when it foundered.
This year’s banking crisis is not as widespread or dramatic as the 2008 version. However, the slow-burning nature of the regional banking crisis will extend to its economic impact. It could take just as long to eradicate, and leave damage to savers’ psychology that is just as lasting.