The domino effect of collapsing regional banks threatens the U.S. economy as interest rates rise.
The regional banking crisis in the United States is worsening, with several banks witnessing a significant decline in their stock values following the collapse of First Republic Bank over the weekend. This comes on the back of Silicon Valley Bank’s collapse just a matter of weeks ago. The situation has cast doubt on the effectiveness of regulation and risk management in the industry, as higher interest rates impact the real economy and cause substantial losses in the fixed-income portfolios of regional banks.
Regional Banks in Trouble
The collapse of First Republic Bank and Silicon Valley Bank is attributed to a failure in regulation and poor internal risk management, which in turn triggered massive deposit outflows. Regional banks are now facing considerable losses on their Held-to-Maturity (HTM) portfolios. As a result, they cannot raise deposit rates, which would further harm their profitability and accelerate outflows.
The Fallout: Deposits Shift to Safer Alternatives
As regional banks struggle to cope with the crisis, hundreds of billions of dollars in deposits have been flowing out of these institutions and into money market funds and larger, more secure financial entities. The end-state and how this regional banking crisis will be resolved
Stock Market Impact: Regional Banks Take a Hit
Several regional banking stocks have suffered significant declines today, further highlighting the importance of keeping an eye on this for investors:
Western Alliance: -30%
Metropolitan Bank: -27%
Zions Bank: -15%
Citizens Financial: -12%
The Ripple Effect on the Economy
The collapse of regional banks has far-reaching consequences for the broader economy, creating a vicious cycle of tightened lending standards, reduced access to credit, and slowed economic growth. The process can be summarized as follows:
Regional banks collapse.
Banks tighten lending standards.
Credit becomes more expensive.
Firms struggle to obtain financing or face higher interest rates.
Companies lay off employees as a result.
Consumers struggle to pay mortgages and reduce spending.
The economy slows down.
Banks further tighten lending standards.
Delinquencies and forced sales increase.
Unemployment and borrowing costs rise.
The economy slows down even more.
Fed Rate Hike Looms: A Tipping Point?
The Federal Reserve is expected to raise interest rates again tomorrow by 25 basis points, adding fuel to the fire. As the situation worsens, lawmakers in Congress have urged Fed Chair Jerome Powell to halt the rate hikes, turning the crisis into a political issue.
A Call for Action: Time for a Pause?
As the regional banking crisis in the U.S. continues to unfold, all eyes are on the Federal Reserve and its response to the situation. With mounting pressure from Congress and the deteriorating state of the economy, it might be time for the Fed to reconsider its approach and pause on further interest rate hikes.
The intensifying regional bank crisis in the United States has far-reaching implications for the economy, the stock market, and the financial stability of millions of Americans. The Federal Reserve’s response to this crisis could play a crucial role in determining the trajectory of the U.S. economy in the coming months.
If you’re interested in the intersection of technology and finance, be sure to check out our recent article on Apple’s entry into the banking sector. As the traditional banking industry faces challenges, big tech companies like Apple are making a move to disrupt the market. Read more about Apple’s strategy and what it could mean for the future of banking here.