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Is the US regional banking crisis over?

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The past two months saw the bankruptcy of four US regional banks: Silvergate Bank on March 8, Silicon Valley Bank on March 10, Signature Bank on March 12, and First Republic Bank on March 1.any May. Treasury Secretary Janet Yellen learned of the disastrous consequences of the 2008 bankruptcy of Lehman Brothers; It was able to take the necessary measures to prevent depositors from suffering the slightest loss and restore confidence in the banking system in order to avoid the impact of contagion. However, is the US regional banking crisis over?

Often the same causes produce the same effects. Deposit withdrawals are increasing due to the anxiety of some customers who fear the collapse of the bank and want to be the first to restore their liquidity. Then investors begin to doubt the bank’s ability to create value; They sell back their shares and he follows them hedge funds Those who sell the security short. In such a context, the stock market collapses and all customers who follow the development of the situation on social networks panic. Instead of heading to a bank branch to close their accounts, customers now simply need to use an app, downloaded on a mobile phone, to transfer their deposits to an account opened at another bank. the bank run And so it took digital form. And so the prophecy of bank failure became more quickly self-fulfilling.

The solidity of the American banking system, reaffirmed almost daily by Joe Biden, Janet Yellen or the head of the Federal Reserve, Jerome Powell, is a reality. Even the accounts of the first quarter of 2023 for US regional banks show solvency levels such as allowing for the absorption of losses caused by the financial shock. The solvency ratio followed by investors most commonly relates Tier 1 capital, or “tier 1 equity,” to the commitments made by the bank. Even if US regional banks escape the control of the US regulator, they publish, at the end of the first quarter of 2023, a Tier 1 capital ratio on average above 10%, while the minimum requirement, set by the Basel Committee, is 7%. .

However, solvency is not a guarantee of liquidity: high precautionary capital, which, like customer deposits, finances loans and investments in long-term bonds, does not constitute immediate access to liquidity, let alone cause losses to the bank. In the absence of US regulator liquidity restrictions on US banks with a total balance sheet of less than $250 billion, as is the case for most regional banks, the priority is to still be able to guarantee all depositor funds.

The cost of bankruptcies, notably Silicon Valley Bank and Signature Bank, was about $18.5 billion, of which $15.8 billion was used to bail out depositors from incurring losses. In this context, the depositor guarantee organization, the Federal Deposit Insurance Corporation or FDIC, decided to reconfigure its reserves by re-liberating this amount to the 113 largest banks whose balance sheets total at least $5 billion. Thus, for two years from the second quarter of 2024, the respective banks will have to pay 0.125% of the amount of uninsured deposits to the FDIC.

In contrast to the French banking system, the American one remains fragmented. Thus, the FDIC insures the deposits of 4,500 banks. However, 95% of the bill amount set by the FDIC will be honored by the country’s major banks.

Despite this, depositors and investors do not look entirely reassured and remain very alert to any announcement from the regional banks. For example, when, following the bankruptcy of the First Republic, Backwest Bancorp announces that it is looking for all possible solutions, including recapitalizing and selling a large loan portfolio, its share price drops by 52%; When it announces, a week later, that its dividend per share will fall to $0.01, from $0.25 during the previous breakup, its price vanishes and erases nearly all of the previous week’s losses. This appears to reflect renewed interest in the bank’s solvency. But the respite was short-lived: the announcement on May 11 that the bank had lost nearly 10% of its deposits between May 4 and May 5 sent its share price down 23%.

Obviously, investors are scrutinizing the development of deposits, the share of deposits not insured by the FDIC although there is no loss incurred by the account holders of Silicon Valley Bank and Signature Bank, but also the bank’s participation in loans. Given to players in the real estate sector.

The development of remote work has led to an increase in office vacancies, the value of which decreases based on future rents, especially in cities on the West Coast of the United States, such as San Francisco. Receivables from real estate professionals then result in a decrease in value. In addition, refinancing their debts, when due, is more sensitive because the bank loan cannot ignore the value of the building that acts as collateral.

Despite the effectiveness of the federal government’s interventions to avoid losses for depositors, the high volatility in the shares of US regional banks does not allow, so far, to announce the end of the crisis. It depends on a return of depositor and investor confidence which can be boosted by the supervision of regional banks by the regulator. Meanwhile, the situation is conducive to positioning movements within the sector; Janet Yellen just said that the US regulator should be open to mergers between mid-sized regional banks.

Olivier Levin is an affiliate professor at HEC Paris

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