The Banks Are Not OK
The Banks Are Not OK
By Tyler Durden Thursday, Dec 28, 2023
Authored by Michael Wilkerson via The Epoch Times,
It has been nine months since the spectacular and sudden collapse of Silicon Valley Bank.
After witnessing three of the four largest bank failures in U.S. history in 2023, the attention of the media and the markets has turned elsewhere. Banking crisis? It is as though it never happened. Having fallen by some 40 percent in March, the NASDAQ Bank Index has recovered to within 15 percent of its high from February. In the last few months, nearly all markets have gone on a bull run, including bank stocks.
Yet, and despite the relative quiet, the banking sector is not in great shape. Here are some of the reasons why.
Banks continue to lose deposits. According to data from the Federal Deposit Insurance. Corp. (FDIC), U.S. banks have now lost deposits for six consecutive quarters. While the pace has slowed from the first quarter of 2023, in which nearly $500 billion of deposits were removed from the banking system, approximately $190 billion of deposits have been withdrawn in the last two quarters. Indeed, U.S. banks have lost a net $1.1 trillion of deposits since the beginning of 2022 when interest rates began to rise.
With customer deposits growing scarce, U.S. banks are instead relying on emergency funding lines from the Federal Reserve Banks and the Federal Home Loan Bank (FHLB) system. FHLB bond capital raising, of which the proceeds are used to fund the banks, is up 89 percent year over year through November and looks set to reach $1.1 trillion for 2023. Use of the Bank Term Funding Program, the emergency line put in place by the Fed in March 2023, reached an all-time high last week at $131.3 billion.
This does not reflect normal market operations.
This is a sign that the bank funding markets aren’t operating properly, and that the regulators are stepping in to help prop up the system.
[ZH: Additionally, that bailout program from The Fed is due to end in March. What happens then?]
The growing gap between the rate on the Federal Reserve’s nascent funding facility and what the central bank pays institutions parking reserves suggests officials will let the program expire in March, according to Wrightson ICAP.
“In justifying the generous terms of the original program, the Fed cited the ‘unusual and exigent’ market conditions facing the banking industry following last spring’s deposit runs,” Wrightson ICAP economist Lou Crandall wrote in a note to clients.
“It would be difficult to defend a renewal in today’s more normal environment.”
What happens then?]
So much for the liabilities side. But banks face challenges on the asset side as well.
Unrealized losses on investment securities, which is the same problem that got SVB into trouble a year ago, continue to rise. U.S. banks reported unrealized losses of over $684 billion in the third quarter, up 22 percent from the second quarter. Of these unrealized losses on securities, $294 billion are categorized as available for sale (AFS), as opposed to held to maturity (HTM), whereby the bank intends to hold the asset and (hopefully) recapture principle at the end of the term.
The high amount of AFS suggests that if interest rates remain “higher for longer,” then a portion of these losses will begin to realize in 2024 as they are sold by the banks. This will pressure profitability and capital levels.
To continue reading, please go to the original article here: