The U.S. bank crisis has been on the radar of investors worldwide since early March, despite financial regulators and bankers' assurances that the worst time was over and the banking system remains strong. In fact, uncertainty has continuously hit the banking industry, and more regional small and medium-sized bank crises are gradually being exposed.
During the May 4 FOMC meeting, Phoenix-based Western Alliance lost about -30% in after-hours trading. Western Alliance's share price has plummeted -90% since the beginning of this year. Metropolitan Bank (MCB) has experienced a -20% decline (-63% year-to-date). Other regional banks facing significant problems include Valley National (-15%), HomeStreet (-11%), and Salt Lake City-based Zions (-10%).
The liquidity crisis caused by the global economic downturn is still the main reason.
Under the pressure of the pandemic, various industries have been severely impacted. To address economic issues, the US government had to adopt a quantitative easing policy for the US dollar. However, the result was an unprecedentedly high inflation rate in the US, which reached over 9% in July 2022.
In the context of high inflation, the Federal Reserve had no choice but to begin a cycle of US dollar interest rate hikes. As of May 4th, the Federal Reserve has raised interest rates for the 10th consecutive time, with a cumulative increase of 500 basis points, bringing interest rates to a range of 5.00%-5.25%. Depositors urgently want to withdraw their money and invest in places with higher interest rates, leading to a depletion of liquid funds and triggering a banking crisis.
Regional banking regulatory issues need to be urgently resolved
The Federal Reserve has fiercely criticized itself in a 114-page report for its failures that led to the collapse of Silicon Valley Bank. The Federal Reserve has been more open about its mistakes than ever before, acknowledging that it had shown "slow risk recognition and slow regulatory action." The Federal Reserve needs a cultural transformation. Michael Barr, the Vice Chairman responsible for regulation, took office in July and attempted to strengthen oversight. However, it is particularly concerning that even issues identified by frontline Federal Reserve staff have not been addressed.
Equally disappointing, the Federal Reserve's review did not point to any specific culprits. The central bank has refused to disclose whether anyone was fired as a result of this disastrous failure. A truly independent evaluation is urgently needed. On Friday, the Government Accountability Office released a preliminary review that identified many errors by the San Francisco Federal Reserve Bank, including how regulatory agencies "did not recommend pursuing a single enforcement action despite the serious liquidity and management problems that led to the bank's collapse prior to the Federal Reserve's involvement."
Overall, weak regulation has had a broad impact in addition to the effects of interest rate hikes. According to Goldman Sachs, US banks with assets under $250 billion account for 50% of commercial and industrial loans, 45% of consumer loans, 60% of residential mortgage loans, and 80% of commercial real estate loans. This may become an even bigger problem in the coming months if the trend of working from home weakens office space's value nationwide.
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