With more and more regional U.S. banks experiencing financial difficulties, the question arises as to what impact this will have on the banking sector and on the financial market.
After the long-known bankruptcies of Silicon Valley Bank and Signature Bank, First Republic Bank was recently closed and taken over by JP Morgen. As a result, further share prices of various regional banks collapsed. For example, PacWest Bankcorp and Western Alliance Bankcorp lost over 90% of their stock value in recent months, Metropolitan Bank lost over 70%, and Valley National Bancorp lost nearly 50%. Similarly, First Horizon Corp and Zions Bancorp share prices each lost nearly 70% since the end of January. There is no recovery in prices in sight, as all the banks mentioned suffered further losses in pre-market trading today.
The assets of the 3 now-closed U.S. banks amount to a hefty sum of $532 billion, which itself significantly exceeds the total assets of the 25 banks that fell victim to the 2008 financial crisis. These held assets worth “only” $373.6 billion. While the U.S. money supply has increased sharply since 2008, and inflation has also made it worth much less, this could be another indication that the banking crisis could get worse.
This thesis is also supported by the Vice Chairman of Berkshire Hathaway, Charlie Munger, to the Financial Times. According to the report, many U.S. banks are sitting on a large number of “bad loans” that were used to build commercial properties over the past 10 years. As demand, and therefore prices, for such properties have continued to fall, banks are not only having to adjust their balance sheets as the properties pledged as collateral rapidly lose value, but also face increasing defaults. While large banks can count on government support here, many smaller banks could run into major problems and be taken over.
To prevent that, the Federal Reserve would have to stop raising interest rates, but that hasn’t happened yet and probably isn’t planned. It is therefore becoming increasingly likely that the current banking crisis will escalate into a situation comparable to the financial crisis of 2008.
