Bloomberg Analysis: The Banking Crisis of March 2023 Raises Concerns About Stability of US Banking System
The banking crisis of March 2023 has sparked concerns regarding the stability of the banking system in the United States. With three mid-sized banks suddenly failing, including Silicon Valley Bank (SVB) which became the second-largest bank failure in US history, it has become apparent that systemic issues exist within the industry.
SVB’s failure was primarily attributed to its heavy investments in long-term bonds, which suffered substantial losses as interest rates rose. Coupled with a failed equity offering, this triggered a bank run, further exacerbating the problem. While it may be tempting to view these issues as isolated incidents, the reality is that the problem runs deeper.
One of the underlying causes of the crisis stems from the Federal Reserve’s quantitative easing (QE) measures, which resulted in a significant increase in uninsured deposits in the banking system. Smaller banks, typically more conservative in their approach to liquidity, deviated from their prudent practices during the pandemic-era QE. By early 2023, their uninsured demandable deposits had exceeded 30% of liabilities, leaving them vulnerable to sudden outflows.
As the Fed raised interest rates, the value of these banks’ assets plummeted. Although accounting tricks helped conceal some of the losses, SVB’s failure shed light on the true fragility of these banks’ balance sheets. This loss of investor confidence led to a decline in the KBW Nasdaq Bank Index and a surge in deposit outflows from many banks.
In response to prevent further losses, the authorities took action. The Treasury assured uninsured depositors in small banks that they would not suffer losses in future bank collapses, providing some reassurance to the market. Additionally, the Fed introduced a facility that allowed banks to secure loans against the face value of their securities, and the Federal Home Loan Banks increased lending to stressed banks. Borrowing from these official sources soared, thereby mitigating the risk of a full-scale banking crisis.
While the intervention from the Treasury and the Fed successfully prevented a catastrophic outcome, questions still linger regarding the root causes of the 2023 banking stress. Was it a result of the pandemic-induced monetary stimulus and lack of supervision? Did advances by the FHLBanks delay failed banks’ capital raising efforts? Furthermore, by relying on official backstops, are banks merely postponing an eventual reckoning for distressed commercial real estate borrowers?
The crisis also highlights the issue of moral hazard, as bankers and uninsured depositors face no consequences for their risky behavior. Despite banking reforms implemented over the past 15 years, the authorities have demonstrated a willingness to bail out market players when a significant number of them have taken the same risks. This “too many to fail” phenomenon poses a threat to capitalism and cannot be ignored.
The March 2023 banking crisis should not be dismissed as a mere footnote in history. Its ongoing repercussions have had a negative impact on small and medium-sized companies, as evidenced by the underperformance of the Russell Microcap Index. It is crucial to examine the circumstances surrounding the crisis and ensure that lessons are learned to prevent future financial instability.
Analyst comment
Negative news: The banking crisis in March 2023 raises concerns about the stability of the banking system in the United States. Several mid-sized banks failed, including Silicon Valley Bank (SVB). The crisis exposed systemic issues and led to a decline in the KBW Nasdaq Bank Index and deposit outflows from many banks. Government intervention prevented a full-scale catastrophe, but questions remain about the underlying causes and the issue of moral hazard. The crisis has had a negative impact on small and medium-sized companies. Lessons need to be learned to prevent future financial instability.
