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More U.S. banks likely to fail as banking crisis deepens

In this post:

  • U.S. regional banking crisis continues to deepen, causing declines in equities, bonds, and the U.S. Dollar.
  • As some banks face pressure, others tighten lending conditions, potentially slowing down the economy.

As the U.S. banking crisis intensifies, investors are warned to brace for more turbulence in the regional banking sector, which could lead to further declines in equities, bonds, and the U.S. Dollar.

Following the financial meltdowns of Silicon Valley Bank, Signature Bank, First Republic Bank, and the potential collapse of PacWest Bank, Western Alliance Bank, and First Horizon Bank, the situation appears increasingly challenging to contain.

The ripple effect on U.S. lending conditions

U.S. bank stocks and the USD fell sharply again on Thursday amid fears that PacWest and Western Alliance would be the next regional lenders to cease operations.

As some banks face increasing pressure, other banks in the sector are tightening their lending conditions to shore up their own capital. This move results in less money flowing into the economy, ultimately leading to a slowdown.

Consequently, the Federal Reserve may not need to raise interest rates further, and money markets now show 100 basis points of cuts expected by year-end.

In contrast to the U.S. and Europe, where Credit Suisse was rescued by UBS, the UK has managed to avoid similar banking issues.

After the 2008 financial crisis, UK banks faced increased regulations and capital holding requirements, with authorities striving to prevent another crisis from happening.

U.S. banks also experienced stricter rules and regulations, but these were relaxed under the Trump administration, aiming to boost growth in the sector and the economy.

Loosened regulations and bank vulnerability

Pär Magnusson, Fixed Income Strategist at Swedbank, notes the irony of regional U.S. banks lobbying for fewer regulations during the Trump administration, only to find that the relaxed regulations now make them more vulnerable to bank runs.

A 2018 Trump law enabled regional banks to break free from annual Federal Reserve stress tests that required them to maintain specific levels of capital and liquidity to withstand elevated withdrawal periods.

According to Magnusson, there are several issues contributing to the inability of U.S. regional banks to meet customer deposit withdrawal requests.

First, heavy investment in long-term government debt, which was particularly relevant to the failed SVB in March, has caused the value of this debt to fall as the Federal Reserve hikes interest rates.

This means that banks like SVB saw their asset base shrink when depositors increasingly wanted to withdraw their deposits.

Exposure to real estate lending

Another issue is the exposure of regional banks to real estate lending, which becomes a vulnerability when property values fall in response to higher mortgage costs.

Data shows that the average exposure to commercial real estate loans among regional banks is 29%, while it is only 6% among large banks.

The U.S. regional bank crisis is spreading. With every bank that succumbs to shrinking deposits and/or market distrust, the probability of more banks falling victim to similar fates grows. A vicious spiral may be about to take hold. A general risk-off reaction is becoming increasingly likely, and you should position for this risk.

Pär Magnusson

As the Dollar has proven vulnerable to domestic banking issues, any deepening of the crisis could prompt further declines. However, if the crisis appears to be over, the Dollar may experience a reversal, sending GBPUSD lower.

For now, though, the crisis continues to simmer despite regulators’ best efforts.

Disclaimer: The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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