Banking Crisis triggered by the recent collapse of Silicon Valley Bank (SVB) with nearly $200 billion in uninsured deposits, the 2nd largest bank failure in U.S. history, has sent shockwaves through the financial industry. But according to sources close to the matter, the Federal Deposit Insurance Corporation (FDIC) has known about this looming crisis for years.
FDIC Board Member and former Chairman Martin Gruenberg, speaking at the Center on Regulation at Brookings in 2019, warned of the collapse of regional banks, which he defined as those with assets between $50 billion and $500 billion. He pointed out that regional banks had received very little attention since the financial crisis and their “reliance on uninsured deposits has potential systemic consequences.”
Despite this warning, the FDIC has been focused on supporting large banks since the 2008 financial crisis. The result? We are now paying the price for the lack of attention paid to regional banks.
Capitol One Credit Default Swaps Are Skyrocketing
Adding fuel to the fire, Capitol One Credit Default Swaps are now surging faster than during the global predicaments of early 2020. This banking crisis is far from over, and it seems that the FDIC’s lack of action has only made the situation worse.
Fed Rate Hikes Expected to Stop, Money Printing Continues
Meanwhile, the Fed rate hikes that were once expected to help the banking industry have stopped. It appears likely that now (5%) is the peak for Fed interest rates. Instead, the Fed has been busy adding to its balance sheet, printing more than $300 billion in just the last two weeks. This is on top of the $100 billion added to the balance sheet the previous week.
Bank Deposits Are Being Moved to Money Market Funds
As if that wasn’t enough, there’s also an ongoing exodus of bank deposits to money market funds. Banks aren’t earning much on their bond portfolios (SVB was earning 1.56% on $80B), so they can’t offer ~5% interest to depositors. As a result, Money Market Funds now offer ~5% returns.
Overseas Banking Crisis
The banking crisis that has been brewing in the US for years has now spilled over to overseas banks. Non-G7 banks are feeling the heat and borrowing massive sums from the Fed. In fact, one non-G7 bank just borrowed the maximum amount of $60 billion from the Fed. The FDIC’s lack of attention to regional banks has caused this crisis to spread like wildfire and now, it’s a global issue.
The Fed’s BTFP program has been backstopping banks’ underwater bond portfolios domestically, but now that the crisis has shifted overseas, it’s unclear how much help the Fed can provide. Investors are on edge, worried about the impact this will have on the global financial system. It’s clear that this crisis is far from over, and the FDIC’s lack of action has only made the situation worse.
Charles Schwab Is Also Feeling the Heat
The exodus of deposits to higher-yielding Money Market Funds is also impacting American financial giant Charles Schwab. Credit Default Swap prices have suddenly jumped for the stalwart investment institution.
The Banking Crisis Continues
The Fed just reported that U.S. banks borrowed $475 billion last week as the banking crisis continued. Meanwhile, over $500 billion has been withdrawn from small banks in the TWO WEEKS since SVB collapsed.
It’s clear that the banking crisis is far from over. The FDIC may have known about it for years, but their lack of action has only made things worse. Investors should be prepared for more turmoil in the financial industry in the coming months.