Federal Reserve and Regulators are Powerless In Preventing Bank Runs, U.S. Stocks Rebounded

Barry Adams
16 Mar, 2023
New York City

Stocks rebounded amid lingering worries of the health of  the U.S. financial system and lax oversight of banks. 

Benchmark indexes advanced 1% but bank stocks traded volatile as investors searched for banks with a higher percentage of uninsured bank deposits. 

The rapid collapse of Silicon Valley Bank was initiated by the persistent urging of venture capitalists to their list of companies to yank deposits. 

Silicon Valley Bank had as much as 80% of its accounts holding balances above the insured amount of $250,000. 

There is a widespread erroneous perception in the regulatory community and on Wall Street that Silicon Valley fallout was a special case and other mid-sized banks are better capitalized with a more diverse deposit base. 

Similar deposit concentrations exist in the entire banking landscape across the U.S.  

Regional banks in Texas, Colorado and Dakotas have deposits concentrated in the energy patch, banks in the Midwest have farming concentration and large city banks have commercial real estate exposure. 

Oil and agriculture prices have been depressed for a long time in the past, but interest rates were not rising at a rapid pace. 

When rates are on the rise and certain commodities or product prices plunge, the problem of deposit risks evolves rapidly with a lag of 12 months. 

Signature Bank collapsed a year after the Bitcoin and cryptocurrencies boom went bust and Silicon Valley Bank disappeared after the bust of  Pandemic-fueled venture funding boom. 

If crude oil prices dropped and stayed below $55 a barrel for a year and wheat or corn prices collapsed 50% and stayed depressed for a year, a year later deposit risks could lead to insolvencies at many banks.   

The size of the bank will not matter but the nature of allocation of bank's assets between Available-for-Sale and Held-to-Maturity will separate winners from losers. 

None of these mini-busts would have mattered if rates were stable or falling, but rates are going higher and the Federal Reserve has managed this economy with negative rates for more than a decade. 

Neither the Federal Reserve nor the U.S. Treasury is capable of preventing the deposit runs from happening, because they are equipped to clean up what happens after the bank run. 

It is no surprise that all financial and bank regulators missed the problems at Silicon Valley Bank and Signature Bank, because they have no tools to detect or monitor these booms, busts and deposit concentration types. 

Now that the decade long boom in the U.S. Treasuries came to an end in 2022, it is wishful thinking to expect the bust not to play on a grander scale in the banking and insurance industry.   

Neither the Federal Reserve nor the U.S. Treasury is capable of preventing it from happening again. 

 

Indexes & Yields 

The S&P %00 index increased 1% to 3,930.08 and the Nasdaq Composite index advanced 1.6% to 11,618.64. 

The yield on 2-year Treasury notes rose to 4.17%, 10-year Treasury notes inched lower to 3.48% and 30-year Treasury bonds inched lower to 3.62%. 

Crude oil declined 12 cents to $67.55 a barrel and natural gas prices rose 7 cents to $2.55 a thermal unit. 

 

U.S. Stock Movers 

Regional banks continued their downward slide after the collapse of Silicon Valley Bank. 

Comercia fell 1.5% and Zions Bancorp declined 3.5% but Western Alliance Bancorporation rose 1.4%.  

First Republic Bank dropped 20.2% to $24.87 and 61 million shares changed hands, four times its average daily volume. 

Investors are worried that the Los Angeles-based bank has a high percentage of uninsured deposits. 

Credit Suisse AG jumped 3% to $2.23 after the Swiss bank said it will borrow up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank. 

Two days ago, Saudi National Bank, the largest shareholder in the bank said it would not inject additional liquidity in the embattled bank. 

Occidental Petroleum Corporation increased 2.0% to $57.93 after Warren Buffett controlled Berkshire Hathaway purchased additional 7.9 million shares for $466.7 million.