Potential Caution for US Banks in the Month of March

Potential Caution for US Banks in the Month of March

In the month of March, US banks could be facing a potential crisis that has been brewing since the collapse of Silicon Valley Ban (SVB) one year ago. The issues within the banking system, particularly among regional and smaller community banks, have not been resolved and have only worsened over time. The problems include the inability to raise deposit funding, increased reliance on emergency government funding, unrealized losses on securities portfolios, and mounting losses on loans to the commercial real estate sector and consumers.

The year 2023 saw significant bank failures, including SVB, First Republic, and Signature Bank, as well as the forced merger of Credit Suisse into UBS. These events led to downgrades of several US banks by credit rating agencies like Moody’s. Despite claims by US Treasury Secretary Janet Yellen and JPMorgan CEO Jamie Dimon that the banking system was sound and the issues were isolated, investors and depositors remained skeptical and continued to withdraw from regional banks.

Since 2022, depositors have taken out over $1 trillion from the US banking system. This outflow intensified after the collapse of SVB, prompting the Federal Reserve to intervene with the Bank Term Funding Program (BTFP) to restore liquidity. However, instead of reducing their reliance on government funding, banks have actually increased their use of the BTFP over the past year.

The BTFP is set to expire on March 11, 2024. Despite reaching peak utilization at $167 billion, the Federal Reserve announced that the program would expire as planned. However, this decision was met with caution by market participants. Utilization of the BTFP remains near all-time highs, indicating that banks are struggling to find financing on market-related terms without impacting their profitability and capital.

While larger banks are benefiting from profitable reserve deposits with the Federal Reserve, regional and smaller banks face higher funding costs and limited access to the Fed discount window. The Fed’s willingness to run losses has largely benefited the too-big-to-fail (TBTF) banks, creating a crony capitalism situation that will ultimately be borne by the US taxpayer.

Furthermore, on the Ides of March 2020, the Federal Reserve eliminated reserve requirements for US banks, meaning they are no longer required to keep any cash on hand to meet depositor demand. This change removes even the pretense of banks having adequate cash reserves in case of a sudden surge in withdrawals.

If another deposit run were to occur, the Fed and US Treasury would create additional money out of thin air to meet depositor demands. However, this would only add to the already staggering US government debt, resulting in inflation and a loss of purchasing power for Americans.

As of September 2023, the banking system had an estimated $1.5 trillion in unrealized losses on their portfolios and loan books. If these losses were marked to market, it would significantly deplete bank capital and leave the banking system undercapitalized. Overall, the system lacks sufficient capital to absorb growing losses and lacks enough liquidity to handle another deposit run.

The potential outcome could be a crisis larger than the global financial crisis of 2008–09, potentially leading to the nationalization of the banking system. In such a scenario, the US dollar’s purchasing power would be greatly debased as trillions of new money is created to prop up the financial system.

In conclusion, US banks face potential cautionary concerns in the month of March. The underlying issues within the banking system have not been resolved and have only worsened over time. The reliance on emergency government funding and growing losses pose a significant threat. It is essential for regulators and market participants to closely monitor the situation and take necessary precautions to prevent a crisis that could have severe repercussions for the US economy and its citizens.