Welcome to 2008 – 2.0

May 11, 2023

Last week at the FOMC press conference, Jerome Powell stepped up to the mic and addressed, among other things, the current banking crisis.

By now I’m sure you’ve read about the collapse of Silicon Valley Bank (SVB) (about $209 billion in assets) along with Signature Bank (roughly $110 billion) not to mention Credit Suisse across the pond.  

At the root of these failures was something called an asset/liability mismatch.

As the Fed aggressively hiked interest rates in 2022, small to mid-sized banks — those with fewer assets — became victims of something known as “interest rate risk.” The rise in market rates by the Fed pushed the value of their assets lower while at the same time, questions about their liquidity (their ability to cover their customers’ deposits) motivated  depositors to run to get their money.  

Voila! Banking disaster.

The pile of bodies recently got even bigger when First Republic (approx $213 billion in assets) took its dying breaths before the FDIC put it out of its misery and sold the remains to the TBTF (but apparently not too big to take on another hundred billion or so of deposits) JP Morgan (around $3.7 trillion). 

Anyway at the top of his remarks, the very first thing Chairman Powell moved to address was the unnerving situation. He said…

The U.S. banking system is sound and resilient.

That’s what he said, I swear.

A mere two hours later, PacWest Bancorp (approx $41 billion in assets) collapsed in after hours trading when…

“Bloomberg reported that another regional, California-based bank (of course), PacWest Bancorp., was weighing a range of strategic options, including a sale. 

I kid you not.

PacWest Bancorp (PACW)

Source: Barchart.com

Later that same day, First Horizon Corp (roughly $79 billion in assets) collapsed when its pending merger with TD Bank (CAD1.9 trillion – about $1.4 trillion US) fell through. 

Is it possible that Chairman Powell actually didn’t know about the real conditions of these banks? Or has he just been reduced to telling bald-faced lies?

Nothing to see here folks. All is well…

How Bad is It?

It’s not good.

In fact, and this may be hard to believe, it’s worse than the collapse of 2008. Here’s a chart from the FDIC if you don’t believe me…

Source: The Federal Deposit Insurance Corp.

As of May 1, there were 3 US bank failures in 2023 totalling over $548 billion in assets. In 2008, 25 banks failed for a loss of $373 billion. (You can even add in the 140 bank failures in 2009 and this year is still a bigger number!)

And more mid-sized banks — banks with assets between $50 and $200 billion — could be on the bubble.

The news is making savers nervous. According to a Gallup poll conducted in April: 

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.

I’d say it’s a normal reaction. 

But you shouldn’t worry. Unless you have over $250,000 on deposit, the FDIC has your back.

What’s more troubling is the impact all this is having on banks. Their response to all this chaos has been a sharp tightening of credit (lending).

And in an economy that is 100% dependent on credit, that’s going to be a bigger problem.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily