Depositors flee from small US banks… and warnings of deeper collapses
Despite the messages of reassurance that the Federal Reserve (the US Central Bank), the Treasury Department, and the White House have been keen to send to depositors in recent days, small banks have witnessed severe unrest, amid mass flight by depositors, which prompted lawmakers to ask the financial authorities for quick interventions, including raising the ceiling Securing deposits or eliminating this ceiling mainly in order to maintain the stability of a very sensitive sector for the largest economy in the world.
The collapse of three banks in just 11 days during the current month may be just the beginning of alarming collapses in the coming days, especially with what is known as herd thinking dominating the movements of depositors in recent days.
According to data released by the Federal Reserve last Friday, deposits in small banks decreased by $120 billion in the week ending March 15, while they rose in 25 large banks by regarding $67 billion.
In general, US bank deposits recorded the largest decline in regarding a year, to $17.5 trillion in the aforementioned period, coinciding with the collapses recorded by the banking sector and affected “Silicon Valley”, “Signature” and “First Republic” banks.
Deposit withdrawals from banks prompted officials of the Financial Stability Monitoring Board to discuss the matter during a closed-door meeting held by Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell, along with 10 other officials, last Friday, according to what was reported by the American “CNBC” network. .
Despite the concern that dominates depositors regarding the crisis of bank collapse, the head of the Central Bank said on more than one occasion during the past days that “the banking system is safe,” trying to reassure customers regarding the solidity of the banking system in the largest economy in the world.
However, concern is growing regarding what the collapse of small banks might cause in terms of panic waves in the markets, no less than the panic that might be caused by the bankruptcy of major banks. Although the 25 largest banks account for nearly three-fifths of lending in the United States, smaller banks are the most important providers of credit in some key areas, including commercial real estate.
The $5.6 trillion commercial real estate lending market, 70% of which comes from small and medium banks, as exposure of small banks to commercial real estate lending has grown at an accelerated rate over the past ten years, according to a report by investment bank Morgan Stanley.
It is not the crisis of deposit flight alone that is facing small banks, but rather they are grappling with another problem that is no less serious, represented in the credit crisis that threatens their existence. As funding costs rise, banks will cut back on loans.
The problem of the banking sector in this period appears to be more complex than in any previous period. Despite lingering concerns surrounding the credit market, policymakers moved ahead with a ninth consecutive hike in interest rates last week as they seek to stem still-runaway inflation.
Although the Federal Reserve confirmed in a statement, last Friday, following a two-day meeting, that “the US banking system is sound and resilient,” it warned that “recent developments are likely to lead to a tightening of credit conditions for households and companies and affect economic activity, employment and inflation.” The extent of these effects is uncertain.
“It’s a complete game-changer from what we’ve seen before,” Citigroup CEO Jane Fraser said in an interview with Carlyle Group co-founder David Rubinstein at an Economic Club event in Washington last Wednesday. Fraser added, according to what was reported by Bloomberg Agency: “It’s just that two tweets were posted (referring to the Silicon Valley bank crisis), and then this thing happened at the fastest pace in history.”
After the collapse of Silicon Valley, the Fed provided additional support to banks in need of liquidity. Banks borrowed a total of $165 billion, in a sign of mounting funding pressures. Before the injection of support, cash assets held by banks as a share of their total assets had fallen to their lowest levels in three years.
The sudden speed with which the three banks collapsed in just 11 days led to a state of reeling among depositors and investors, prompting prominent lawmakers and businessmen to warn of deeper crises if quick measures were not taken, such as raising the ceiling for guaranteeing deposits in banks over the value or canceling this ceiling. Mainly in light of the current conditions to calm the markets and maintain the stability of deposits, which are estimated at regarding $17.5 trillion.
The FDIC usually guarantees savings of up to $250,000, which is high enough to put most bank customers to sleep. But the recent pressures facing the banking industry have put on the table the idea of a temporary increase or removal of the cap.
Among those who advocate raising the ceiling for deposit guarantees, billionaire Elon Musk, the richest American and CEO of “Twitter” and “Tesla”, who said that increasing the limit is “absolutely required” to stop the rush for banks to withdraw deposits.
The deposit guarantee limit was applied for the first time in 1934 in an attempt to calm the panic that afflicted the banks in the previous year, and federal deposit insurance began with a maximum limit of $ 2,500, which is equivalent to regarding $ 56,000 today.
According to the Federal Deposit Insurance Corporation, this was an “immediate success in restoring public confidence and stability in the banking system”. The maximum insured deposit has increased by regarding seven times, most recently during the global financial crisis in 2008 to $250,000.
Increasing the FDIC’s limit would require congressional approval, a major hurdle in an era of deep political divisions. Some conservative lawmakers are fiercely opposed to any increase in the FDIC’s insurance limit, including Senator Josh Hawley, a Missouri Republican.
Other Senate Republicans, however, have indicated they are open to the idea, while fellow Democrats want to tie deposit insurance measures into stricter rules for banks.
As of the end of 2022, the FDIC had just over $128 billion in its Deposit Insurance Fund, supporting more than $10 trillion in insured deposits.
The Deposit Insurance Fund derives its financing either through premiums charged to the insured banks, or through interest earned on funds invested in US government securities.
