The debate about the possible continuation of the banking crisis was reignited by Jamie Dimon, CEO of the largest US bank JPMorgan Chase. He gave his reasons for further possible bank failures in the annual letter to shareholders.
On the one hand, he blamed poor management decisions that failed to prepare banks for the eventuality of higher interest rates. Many banks bought US Treasury bonds at a time of cheap money and low yields. These are perceived as risk-free and holding them does not entail the need to increase capital reserves. But higher interest rates resulted in a situation when US banks hold bonds with a total unrealised loss of $600 billion. This is not yet a problem unless the banks are forced to sell these bonds at a loss, as in the case of the run on the bank.
On the other hand, regulators are to blame for not including the eventuality of interest rate hikes in the mandatory stress tests that are supposed to determine whether a bank is prepared for different types of crises. Moreover, the obligation to conduct stress tests was eliminated in 2018 for banks with between $50 billion and $100 billion in assets under management. For banks between $100 billion and $250 billion in assets under management, it was then left to the Fed’s discretion whether and what stress tests to apply to specific banks.
Many banks are currently in a similar situation to the failed Sillicon Balley Bank. They have a high proportion of unsecured deposits and an overly homogeneous clientele.
Unsecured deposits are those in excess of $250,000 per depositor. Anything above this threshold is not protected by mandatory insurance with the FDIC. Clients who are in this situation may get nervous and withdraw their money. Banks as a result of that may develop a liquidity problem. This may lead to the bank being forced to seek additional funds to meet its obligations. This can be very costly in the case of patching losses with loans and loss making in the case of selling its own assets.
A homogeneous clientele and hence a lack of diversification in the portfolio makes the bank vulnerable to failure when problems occur in the particular sector to which it is linked. This is exactly what happened in the case of Silvergate Bank, serving clients associated with cryptocurrencies, or Silicon Valley Bank, serving technology startups.
Given the comically low returns on current and savings accounts, it is in most cases more profitable for bank customers to invest their money than to keep it in the bank. This leads to further pressure on withdrawals.
If the bank is large enough, these problems can spread throughout the financial system. In such a case, we are talking about systemic risk. The aim of regulators is not primarily to prevent bank failures, but to prevent systemic risk. Between 2001 and 2023, 563 banks closed. But most of them were not significant enough.
Uncertainty and distrust in the banking system plays into the hands of reserve assets like gold. Bitcoin is currently a great alternative as it has recently started to behave like a safe-haven asset again. Its major advantage lies in independence from the traditional financial system. It has recently broken the $30,000 mark for the first time since the June of 2022.