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How You Can Monitor the Severity of the US Banking Crisis

Depositors gather outside the closed doors of the American Union Bank in New York City, Aug. 5, … [+] 1931. It is one of the small town banks that experienced a depreciation of their assets and was closed by order of the State Superintendent of Banks. (AP Photo)

Copyright 1931 Ap. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

The sudden collapse of Silicon Valley Bank (SIVB VB) and its March 10 seizure by the FDIC sent shock waves through financial markets and eroded confidence in other banks. While a deeper analysis shows that US banks are solvent overall, concern about banks has spread globally. The challenge of analyzing bank safety is that a serious loss of confidence can actually lead to the collapse of an otherwise functioning financial institution. Thus, it is important to monitor the health of banks with as much high-frequency data as possible.

The most accessible and frequent data are bank stock prices. Bank stocks have been particularly hard hit, with the KBW Bank index down nearly 22% year-to-date. The relatively good news is that bank prices have remained around crisis lows and have not declined further. Furthermore, the broader market has bounced back, indicating less concern about the financial crisis affecting other sectors. Unfortunately, stock prices are very volatile and may reflect sentiment rather than facts in the short term. In addition to government money market mutual fund asset flows, the following all bank data come from the Federal Reserve’s H.4.1 and H.8 weekly reports released on Thursday and Friday, respectively.

bank stocks

Glenview Trust, Bloomberg

A direct way to see the severe stress in the US banking system is the magnitude of bank borrowing from the Federal Reserve through the discount window. Borrowing from the discount window is generally avoided by banks, but the facility can provide emergency liquidity. While the amount borrowed from the discount window has declined from highs, it is only slightly below the highest level registered during the global financial crisis.

US Bank: Discount Window Lending

Glenview Trust, Bloomberg, Federal Reserve

However, looking only at the discount window falls short of the support the US banking system currently provides. Following the collapse of Silicon Valley Bank, the Federal Reserve announced a new facility to help banks meet withdrawal requests from depositors and restore confidence. The Bank Term Funding Program (BTFP) allows banks to borrow the face value of any government bond held in the bank’s portfolio at a very reasonable rate. The Paycheck Protection Program (PPP) facility was created in 2020 to provide assistance during the pandemic. Other credits are backed by bridge banks operated by the Federal Deposit Insurance Corporation (FDIC) until they can be sold or liquidated.

total federal reserve bank credit facilities

Glenview Trust, Bloomberg, Federal Reserve

With the foreclosure of Silicon Valley Bank and Signature Bank, discount window and bridge bank credit utilization increased. Last week, access to the Fed’s facilities was operated by bridge banks. The decline in discount window lending likely resulted in a shift in borrowing for BTFPs. Overall, this relatively modest increase in Fed bank lending bodes well that the severe effects of the banking crisis have not spread beyond banks already on our radar, including First Republic Bank FRC (FRC) and PacWest (PACW). Are included.

Weekly Changes in Fed Bank Lending Facilities

Glenview Trust, Bloomberg, Federal Reserve

Overall, it was good news that bank deposits remained steady and increased marginally after last week’s large outflow. Notably, the 25 largest banks, which include several medium-sized regional banks, increased deposits by nearly $120 billion last week. More troubling is the withdrawal of about $110 billion from smaller banks.

Weekly Change in US Bank Deposits

Glenview Trust, Bloomberg, Federal Reserve

Cash continues to flow into government money market funds outside the banking system. The movement likely reflects an appetite for higher yields and a flight from banks to safety.

Weekly Changes in Government Money Market Fund Assets

Glenview Trust, Bloomberg

Banks increased the cash on their balance sheets to make themselves more liquid and able to cope with deposit outflows.

Weekly Change in Cash on Bank Balance Sheets

Glenview Trust, Bloomberg, Federal Reserve

Banks continued to lend despite the current crisis. Credit growth is likely to slow as banks hoard additional liquidity to strengthen their defenses against possible deposit flight and widening loan losses.

Weekly Change in US Bank Loans

Glenview Trust, Bloomberg, Federal Reserve

In short, the US banking system has begun to show signs of stabilization from the crisis. However, it is too early to declare victory, and confidence in the banking system is badly shaken. The current banking challenge is one of liquidity for most banks rather than an issue of solvency. The pressure on some perceived weak banks is likely to continue, and policymakers may be forced to provide additional support. The outflow of deposits from small banks can be closely watched as more problems may arise if this continues. Small banks are the leading providers of commercial real estate loans so the sector faces low credit availability.


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