After Silicon Valley Bank, Republic Bank announced the collapse of the Bank of the United States, and there are ten more in line

Anti-Short Selling Research Center

2024-04-30 00:58Posted on the official account of Guizhou Anti-Short Selling Research Center

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After Silicon Valley Bank, the first bank to fail in the United States in 2024 - Republic First Bank. To protect depositors, the Federal Deposit Insurance Corporation entered into an agreement with Fulton Bank, which would assume the majority of Republic Bank's deposits and acquire most of Republic Bank's assets.

Observers believe that against the backdrop of the Fed's aggressive interest rate hikes, the sudden collapse of Republic Bank may mean that the crisis of regional banks in the United States is not over.

The latest situation shows that financial institutions such as regional banks in the United States need to sell assets to keep their balance sheets stable, while the Fed's policy has increased the pressure on asset price volatility. Wall Street is also concerned that U.S. regional banks are expected to set aside more money to cover potential commercial real estate losses.

After Silicon Valley Bank, Republic Bank announced the collapse of the Bank of the United States, and there are ten more in line

Source: Sina Finance

The bankruptcy crisis of U.S. banks and the sell-off

In March 2023, Silicon Valley Bank collapsed, which caused a great panic in the US financial markets.

At the time, U.S. Treasury Secretary Janet Yellen said she was working closely with banking regulators to deal with the collapse of Silicon Valley Bank and protect depositors, but did not consider a massive bailout. Because "during the financial crisis, investors and owners of systemically large banks were bailed out...... And the reforms that have been implemented mean that we will not do it again."

Source: Shangguan News

In an attempt to calm market sentiment, Fed Chair Jerome Powell said that the US banking system "remains sound" and that the public can be "reassured" about its deposits.

But after Silicon Valley Bank, Signature Bank collapsed, which sparked widespread controversy about the U.S. government's bailout of Silicon Valley and Signature Bank: some people believe that the responsibility lies with the banks and even depositors, and oppose the government's guarantee of all depositors' deposits, while others believe that the responsibility lies with the U.S. government's monetary easing policies in recent years, as well as its slower response during the event.

Richard Werner, a professor of banking and economics at the University of Winchester, argues that since the Fed was founded to provide banks with emergency liquidity, it should have come to the rescue before Silicon Valley Bank went bankrupt, but the Fed did not provide the necessary amounts. In 1930, when there was a run on thousands of banks, the Fed did nothing, bankrupting about 10,000 banks without providing the promised liquidity.

According to CCTV News: The closure of Silicon Valley Bank highlights the negative impact of the US Federal Reserve's aggressive interest rate hikes, and also shows the failure of the US government's financial management policies. The Federal Reserve's aggressive interest rate hikes led to lower bond prices and increased funding costs, ultimately leading to Silicon Valley Bank's troubles.

Source: Chongyang of the National People's Congress

Then, the 14th largest bank in the United States, the Republic Bank of America (FRC), was also in crisis.

This time, the U.S. financial system acted quickly. On May 1, 2023, JPMorgan Chase announced the acquisition of all deposits and "almost all" of the assets of Republic Bank (FRC). Bankers and regulators are trying to convince investors that the worst of the crisis is over.

However, these pacification measures have had little effect. The market began to suspect that the crisis of confidence among depositors triggered a larger financial crisis, and small and medium-sized US banks ushered in a new round of sell-offs and triggered a death spiral.

According to the Financial Times, the Bank of the West (WAL) is considering a number of options, including an asset sale, possibly all or part of its business. The bank has hired a number of consultants for this purpose. Although the Bank of the West strongly refuted the rumors and said that it would claim compensation through litigation, its stock price still closed down 38.45%, and the intraday decline reached 60%, and the circuit breaker suspended trading at least nine times during the session.

Westpac also considered strategic options, including a sale, but had few interested potential buyers, and its shares plunged more than 50% after closing more than 4% lower.

First Horizon Bank's share price fell more than 50% in pre-market trading. Even though the bank's chief financial officer, Hope Dmuchowski, said that "we have not seen a significant change in outflows, which have remained stable since early March," they have not succeeded in reassuring investors. From April 24 to 28, 2023, the bank lost $10 billion in deposits, or about 10% of its total deposits.

The Federal Reserve's interest rate hike has caused turmoil in small and medium-sized banks

The unimpressed attitude of the U.S. government and the Federal Reserve and the wrong way of thinking about bailouts have continued to cause the crisis in the U.S. banking industry, triggering a new round of industry turmoil.

According to Peng Yuchao, an associate professor at the School of Finance at the Central University of Finance and Economics, the occurrence of systemic risk will undermine the entire banking system. Even if the failed banks are systemically non-important and have a limited impact, if the problem of interest rate hikes persists, many small and medium-sized banks may gradually erupt (even if there are no business connections between the banks). Because depositors will be nervous when they see problems in individual banks, and they will think that there is a problem in the banking system, so they will withdraw money, and the more people who withdraw money, the faster the bank will close or go bankrupt.

Source: Interface News

Since March 2022, the Federal Reserve has continued to raise interest rates, with a cumulative rate hike of 500 basis points, and as of April 28, 2024, interest rates have reached a range of 5.25%-5.50%, the highest level since early 2001, which claims to curb inflation.

Diane Swank, chief economist at Grant Money, believes that the Fed's goal is to ensure that inflation is effectively controlled by raising interest rates, but the Fed may continue to launch "excessively tight" monetary policy without "knowing it" and trigger a recession.

Lindsay Owens, executive director of Groundwork Collaborative, a U.S. think tank, said that because most of the factors driving up inflation in the United States come from external sources, including the Russia-Ukraine conflict and global supply chain disruptions, raising interest rates will have little effect on reducing inflation but will lead to an increase in unemployment. "If monetary policy causes a significant slowdown in the economy, all Americans will pay the price."

Therefore, the collapse of Republic Bank may be the first in the current crisis, and the risks faced by small and medium-sized regional banks in the United States will continue.

First, bank deposits are still draining. Since 2023, the outflow of deposits from U.S. commercial banks has continued, especially after the Silicon Valley Bank incident. According to Federal Reserve statistics, at the end of the third quarter of 2023, the total deposits of U.S. commercial banks were $17.34 trillion, down about 3% from the same period in 2022, of which the total deposits of the top 25 major banks were $10.78 trillion, down about 4% year-on-year, and the total deposits of other banks were $5.28 trillion, down about 1% year-on-year (excluding foreign banks and Edge's total deposits of $1.28 trillion at the end of September 2023).

Second, with the loss of deposits, the scale of financing and borrowing of small and medium-sized banks has continued to rise, increasing the cost of debt, and the situation has become more difficult. Many small and medium-sized banks have been forced to sell assets such as long-term bonds in response to the loss of deposits, causing additional losses, in addition to having to replenish liquidity by borrowing from the Federal Reserve at higher market interest rates.

At the same time, small and medium-sized banks continue to lose their assets. According to Federal Reserve data, at the end of the third quarter of 2023, the total assets and total liabilities of the U.S. commercial banking industry reached $22.9 trillion and $20.8 trillion, respectively, basically the same as at the end of the third quarter of 2022. Loan balances reached $12.2 trillion, up about 4% from the end of the third quarter of last year, and deposits reached $17.3 trillion, down about 3% from the end of the third quarter of 2022. Under the influence of the Fed's monetary tightening policy, the losses of small and medium-sized banks' bond assets will expand.

Notably, the U.S. commercial real estate vacancy rate has risen, and the loan default rate has also recovered. Once the risk of commercial real estate spreads, it will cause another heavy blow to small and medium-sized banks.

In addition, the risk of default on the US federal government's debt will also exacerbate the banking sector's woes. According to the U.S. Treasury Department's December 29, 2023 report, the federal government's debt exceeded $34 trillion on that day. The Congressional Budget Office conducted an assessment in 2020 predicting that the federal government debt would not reach $34 trillion until fiscal year 2029. Now five years ahead of schedule, debt is growing much faster than expected.

In fact, the U.S. government's debt is rising at an average rate of $20 billion a day, and if the existing debt were spread evenly among U.S. citizens, it would amount to more than $100,000 per person.

10 small and medium-sized banks may be at risk of failure

According to Barron's contributor Guo Liqun, a bank's net interest margin is the difference between its average yield on loans and investments and the average cost of deposits and loans. The change in SVB's net interest margin before SVB (SVB's parent company) decided to sell its assets showed that the company was unprepared for the twin factors of rising interest rates and slowing loan growth in the venture capital space. In the fourth quarter of 2022, SVB's net interest margin narrowed significantly and widened only slightly from the year-ago quarter.

Excluding U.S. banks with at least $10 billion in total assets, such as Goldman Sachs and Morgan Stanley, and combining Fact Set's unified net interest margin data for the past five quarters of March 2023, 10 banks saw their net interest margins narrow or widen the least between March 2022 and March 2023. As a result, 10 U.S. regional banks are most likely to face bankruptcy pressure after the SVB crash.

Source: FactSet

Moody's downgraded the credit ratings of the United States and its banks

2023年8月，美国三大机构之一的穆迪下调了美国10家中小银行的信用评级，具体有：Commerce Bancshares、BOK Financial Corporation 、M&T Bank Corporation、Old National Bancorp 、Prosperity Bancshares、Amarillo National Bancorp、Webster Financial Corporation、Fulton Financial Corporation 、Pinnacle Financial Partners和Associated Banc-Corp 。

Moody's has also put six banks, including large banks such as Bank of America, Bank of New York Mellon, and State Street Bank, on the watch list for downgrades, which means that these large banks are at risk of downgrading. Among them, United Bank of America is the top large bank in the United States, and Bank of New York Mellon and State Street Bank are the world's leading financial service institutions.

另外，穆迪还将11家银行的前景展望从稳定调整为负面，包括美国第七大商业银行PNC Financial Services Group、美国第六大零售银行和第十大银行第一资本（Capital One Financial Corporation），以及Citizens Financial Group、Fifth Third Bancorp 、Huntington Bancshares 、Regions Financial Corporation 、Cadence Bank、F.N.B. Corporation、Simmons First National Corporation、Ally Financial 和Bank OZK 。

Also in August 2023, Fitch, one of the three major rating agencies, downgraded the rating of long-term U.S. foreign currency debt to AA+ from AAA, with a stable outlook from negative. This is Fitch's first downgrade of the US credit rating since it was first issued in 1994.

Fitch said the downgrade of the US sovereign credit rating indicates the expected fiscal deterioration of the Biden administration, reflecting expectations of fiscal deterioration over the next three years and a high and growing overall government debt burden.

Fitch expects the general US government deficit to widen to 6.6% of GDP in 2024 and 6.9% in 2025.

U.S. Treasury Secretary Janet Yellen said she strongly opposed Fitch's decision and that Fitch's downgrade of the U.S. rating was "arbitrary" and "outdated." In addition, Biden administration officials said that the cut is not expected to have an impact on U.S. borrowing costs, and that Fitch's decision to downgrade the U.S. rating ignores the resilience and potential strength of the U.S. economy.

As early as 2011, Standard & Poor's, another international rating agency, downgraded the US sovereign debt rating to AA+ for the first time, and has maintained it at this level for a long time.

At present, among the three major rating agencies, only Moody's also maintains an AAA rating for the United States.

Financial institutions are cautious about the U.S. economy

In the first quarter of 2024 earnings call, the CEOs of Wall Street's largest investment banks and financial institutions have argued that inflation and interest rates in the United States may fall, and the economy may continue to grow, but it is worth being wary that stubborn price increases, persistently high borrowing costs, painful recessions and overseas geopolitical conflicts are threats that cannot be ignored.

David Solomon, CEO of Goldman Sachs: The U.S. stock market is hovering around record levels as we continue to see headwinds. These headwinds include concerns about inflation, commercial real estate markets, and escalating geopolitical tensions around the world. While the current environment remains constructive and the market expects a "soft landing" for the US economy, the trajectory remains uncertain. A combination of these factors could slow U.S. economic growth.

Jane Fraser, CEO of Citigroup: The overall picture of the economy in 2024 is deinflation, and growth in many markets looks like it will slow. With regard to geopolitical risks and vulnerabilities, markets are pricing too dovish in risk for some of these factors.

BlackRock CEO Larry Fink: We're facing some of the things that are causing fear in the market. Record cash is still on the sidelines due to fear and uncertainty.

Schwarzman, CEO of Blackstone: The market environment will remain complex. The U.S. economy was stronger than expected, but it is starting to slow somewhat. Despite the recent slowdown, inflation is expected to trend downward in 2024. As we all know, 2024 is also an important election year, with nearly half of the world's population going to the polls, which also brings unpredictability to the future of important policies that affect the global economy.

Morgan Stanley CEO Ted Peake: In a period of financial repression, we will face a certain level of inflation and be more focused on real interest rates. The subsequent development of this period depends on whether interest rates will continue to rise against the backdrop of sustained economic growth in the United States, or whether higher interest rates will remain in place for a longer period of time, leading to a "difficult landing" for the economy. If there is a "hard landing", we will fall into a recession, and the economy and market will slow down.

Bank of America CFO Bosvik: The specific impact of high interest rates on banks depends largely on the reasons for high interest rates. If it's because inflation will still take longer to come back down before the Fed officially starts cutting rates, then it could be a good environment for banks. "Previously, we talked about expecting 6 rate cuts this year, but only a quarter has passed, and the current market consensus has become 3 rate cuts. All we can do is be patient and wait and see how this game goes." ”

It is worth mentioning that during the turbulent times of the U.S. banking industry, there are many third parties who enjoy the benefits. According to incomplete statistics from Sina Finance, JPMorgan Chase Bank, stock short-sellers, U.S. Senator Warren, private credit managers, Wall Street traders who bought Silicon Valley Bank's uninsured deposits cheaply, technology companies that are not implicated in Silicon Valley Bank and Signature Bank, and Internet finance companies that provide U.S. bond and corporate account services have all profited from the crisis.

Take JPMorgan Chase Bank as an example:

The collapse of Silicon Valley Bank has sparked panic among depositors, with many fearing problems with the local banks where they have deposited their money and starting to make emergency withdrawals, while the big national banks are set to see a surge in their deposits.

JPMorgan Chase & Co., the largest commercial bank in the United States by assets, will soon take advantage of the Silicon Valley Bank crisis to quickly grab new market share, another new win for CEO Jamie Dimon.

The Fed will struggle to cut interest rates in June

From this point of view, the Fed's interest rate cuts may alleviate the crisis of small and medium-sized bank failures.

Financial markets are speculating about when the Fed will cut interest rates, but according to the latest CPI data, in March 2024, the US CPI rose by 3.5% year-on-year, the highest level since September 2023, and the market estimates a 3.4% increase and the previous value of a 3.2% increase.

Swap markets are showing a declining likelihood of a Fed rate cut in June 2024.

Interest rate cuts can certainly ease the pressure on the commercial real estate market to a certain extent, but inflationary pressures still exist, and the Fed cannot confirm whether inflation is effectively controlled, and has to wait for new data to come out, so it is tied up.

The 21st Century Business Herald predicts that the biggest factor affecting monetary policy in 2024 is the general election. A premature rate cut by the Fed could be attacked by presidential candidates until inflation is effectively brought under control, and if it cuts rates in June, the Fed could be criticized even more fiercely for being seen as a Biden campaigner.

According to the Wall Street Journal, sell-side banks and other Fed watchers have pushed back their forecasts for the first rate cut from June 2024 to the third quarter. Expectations of only one or two rate cuts in 2024 have also shifted significantly. The total amount of new projected rate cuts by major banks ranges from 25 basis points (Bank of America) to 125 basis points (Citigroup).

Fed official Kashkari said he might not cut rates until 2025, and Bostic said he still expects the Fed to cut rates once in 2024, but he is open to raising rates if U.S. inflation comes back to stalling or moving in the opposite direction.

[Quote]

(1) Suddenly announced, the collapse of the Republic Bank of the United States, becoming the first in the United States in 2024.Shangguan News.2024-04-27.

(2) Everyone is at risk under the tide of bank failures, and small and medium-sized banks in the United States usher in a new round of sell-off.observer.2023-05-05.

(3) U.S. Banking Crisis: "Storm in a Teapot" or "Canary in a Coal Mine"?.Global.2023-05-15.

(4) Nearly a trillion dollars of debt due this year!Beware of this "hidden mine".21st Century Business Herald.2024-02-19.

(5) The U.S. Treasury Secretary has just spoken: The government will not save it! The second largest bankruptcy in the history of the U.S. banking industry broke out, and the stock price fell in a single week to break the 30-year record, and more than 300 institutions spoke out.Hexun.2023-03-13.

(6) Richard Werner: "The Fed is deliberate, it should have acted long ago but it will not be saved".observer.2023-03-18.

(7) Why did Bank of America announce the closure one after another?Is the crisis lifted?.cctv.2023-03-15.

(8) Inventory|Winners and Losers of the Silicon Valley Bank Collapse in the United States.Sina Finance.2023-03-14.

(9) 10 banks that may follow in the footsteps after the collapse of Silicon Valley Bank.Sina Finance.2023-03-11.

(10) "Black Swan" Reappears?Moody's Downgrades 10 U.S. Banks, More Well-known Banks Are on Downgrade Watch.Wall Street News.2023-08-19.

(11) Fitch downgrades U.S. rating, U.S. Treasury Secretary Yellen: strongly opposed.Shangguan News.2023-08-02.

(12) U.S. Banking: 2023 Review and 2024 Outlook|International.Tsinghua Financial Review.2023-12-23.

(13) The United States started 2024 with total debt exceeding $34 trillion, and the government is about to shut down again?.Observation Room 3.2024-01-04.

(14) Will the Fed's "aggressive" move drag the U.S. economy into recession?.chinabelt and road.2022-06-16.

(15) What are the risks of the U.S. economy?Wall Street tycoons issue the latest warning.CBN.2024-04-22.

(16) The Fed's interest rate cut expectations have changed: 20 large Wall Street banks have announced new expectations.bijie.2024-04-13.

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