Former Fed chairmen alarmed by bank shakeup

Former Fed chairmen alarmed by bank shakeup

  • The banking crisis that broke out at the beginning of March is once again gaining momentum and one bank after another is being taken down.
  • The authorities make efforts to contain the situation and try to impose calm, but the institutions continue to deflate.
  • According to a study published by Bloomberg, half of Americans worry about the lack of security of their deposits.

Just when it seemed that the problems related to the fall of Signature Bank and SVB had been left behind, the banking crisis takes a second wind. The First Republic slump, which came despite a bailout attempt by big lenders, revived concerns. Two former Fed officials fear this could be the start of a bigger crisis..

The most recent chapter of the banking crisis has to do with the purchase of First Republic by the giant JPMorgan. Although the CEO of this institution, Jamie Dimon, said that the crisis had ended with the transaction, it seems that it was not entirely accurate. Other regional banks appear to be next on the list with little ability to survive.

One of them is PacWest, which would be in dire straits for private funding. According to internal sources consulted by Specialized media, the management of the financial firm is considering several options that include the sale of the bank. The news immediately triggered a -60% retracement in the stock during the after-hours session on Wednesday.

On the morning of this Thursday, the situation worsened with the end of the First Horizon purchase agreement by the Canadian TD Bank. This purchase attempt for $13.5 billion reportedly failed due to regulatory fears.

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Fed calls for calm are not enough

The Fed repeats the phrase that the US banking system is “solid and resilient” as a mantra. However, that does not seem to generate the greatest confidence among investors. Since the beginning of the year, shares in the banking sector have suffered a large-scale collapse. Experts agree that it would not be surprising if this crisis equals the size of 2008.

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Consequently, about half of Americans would be very concerned about the safety of their deposits in the US banking system. According to a recent Gallup pollonly 20% of people have full confidence that nothing bad will happen to their funds at the lenders.

“Nearly half of Americans are concerned about the safety of money in bank accounts or other financial institutions. A total of 48% of adults say they are worried about their money, including 19% ‘very worried’ and 29% ‘moderately worried’”. Gallup.

Distrust in the ability of lenders to manage their internal situation is evidenced by the pushback of other institutions. Among the most affected in recent days are Western Alliance, whose shares fell a quarter in hours after closing time on Wednesday. Zions Bancorp and Comerica also saw their shares drop -10%.

It is worth mentioning that many regional banks are the focus of concerns due to their situation similar to that of SVB. This includes close ties to the technology sector, large amounts of uninsured deposits and losses in its portfolio of securities.

Added to this is the possible mismanagement of risk and supervisory failures that the Fed itself recognized in its report on SVB. From this it can be said that the least there is is confidence that the banking system is solid and resilient.

Fed officials try to instill confidence in bank users, but have been unsuccessful.
In a recent Gallup poll, it was learned that nearly half of US depositors feel their money is insecure inside bank accounts. The fall of a number of banks since the beginning of March increased mistrust towards the sector. Only 20% of those consulted are unconcerned. Source:

The concerns of former Fed officials

This context leads two former Fed officials, Robert Kaplan (former Dallas Chairman) and Dennis Lockhart (former Atlanta Chairman) to express deep concerns. These former executives fear that the banking crisis could be in its early stages and that the effects will be felt later in a greater magnitude.

In a contact with Bloomberg, Lockhart emphasized that this is a “troubling” scenario. He also said that he expects Fed Chairman Jerome Powell to have more information available. For Kaplan, the financial crisis is far from over. The credit phase (usually the most serious) hasn’t started yet, he contemplated.

During an interview with Bloomberg television, Lockhart commented:

“It seems the markets are moving back and forth and the vulnerable minions of the pack are being driven out. But I would like to believe that Jay Powell has information that suggests that the situation is contained or controllable.”

Since the bankruptcy of the First Republic and its takeover by JPMorgan, conditions have not improved for the US banking system. The KBW regional banking index, which was struggling to regain some of the ground lost on Tuesday, fell the next day. This latest setback occurred as a result of the Fed’s rate hike announcement. By the end of that day it closed at -0.9% and -6.8% a few hours before closing on Thursday.

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Although the Fed is making calls for calm, and so is the Treasury, it is unlikely that the situation will have a happy ending. In that sense, the two aforementioned former central bank officials seem to have every reason to be concerned about the fate of the financial sector.

In any case, the KBW continues its steep decline since reaching its highs in February. Since then, the index has lost 30% of its value as a result of the massive sales of shares of local banks.

First Horizon bank is presented as one of the candidates to be next on the list of the fallen.
Among the weaker regional institutions resulting from this crisis, First Horizon stands out. After a failed merger attempt worth more than $13 billion with Canada’s TD Bank, this lender is expected to have little choice but to collapse. Source:

The problems extend into the day on Thursday

As of this writing, losses in the banking sector are spreading. The institutions named above show not very encouraging numbers, which causes greater uncertainty among investors. Among market data near the end of the day on May 4, Western Alliance shares are down -55%, according to Bloomberg.

Meanwhile, First Horizon falls in its price by -40% as a result of the end of the sale agreement with TD Bank. “We believe that banks are going through their own GameStop moment, where social media is expanding non-traditional approaches to assess creditworthiness,” express Jaret Seiberg, TD Cowen.

The expert adds that this situation generates “a self-fulfilling prophecy that puts pressure on stock prices, which raises more questions.” It is to be taken into consideration that the losses are also extended as a consequence of the warnings of Wall Street personalities. A few hours ago, hedge fund billionaire Bill Ackman warned that the sector’s troubles are far from over.

In a post on his Twitter account, the investor points out that confidence in the banking system takes years to build. However, he regretted, only days are wanted to harm her. “As each domino falls, the next weakest begins to wobble.”, he pointed out.

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The expert believes that financial authorities, including the Fed, should do more to support small banks. He says the downfall of these lenders is, in part, caused by tight monetary policies and mismanagement of supervision.

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The big winners

But if there is any certainty about this situation, it is who the big winners are. These are none other than the major banks, which are “too big to fail”. This security that they generate among depositors means that billions in funds are now leaving small banks for them.

Consequently, the trend towards monopoly seems to be dangerously reinforced. “We are seeing the big banks win, we are going to see massive consolidation and we are going to see very precise regulation of small and mid-cap banks,” Brian Belski of BMO Capital Markets tells the FT. He added that his position is decisive: the regional banks could not compete with the big banks.

But the financial sector giants are not just passive winners from the inability of smaller banks. According to a recent Bloomberg report, the powerful have played a more active role than they would admit. The Goldman Sachs bank would have played a leading role in the collapse of Silicon Valley Bank in early March, according to a recent investigation by the authorities.

According to the investigation report, the SVB would have offloaded a loss-making $22 billion portfolio on Goldman. To cover that shortfall, the lender asked the giant for $2.2 billion in aid, which was denied. As a consequence, the remembered bank run that meant the end of the SVB was unleashed.

Understanding these behind-the-scenes events makes the Fed’s determination to improve regulation more important.

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