Regional Banks Underwater, Big Banks Consolidating As Confidence Falters
Regional banks are feeling the heat as stocks tumble across the sector. Depositors flee to big banks and money market funds for protection, but bitcoin is the only asset without counterparty risk.
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Regional Banks Underwater
Regional bank market capitalizations are being wiped out again this week after J.P. Morgan Chase’s takeover of First Republic Bank. Looking at the KRE U.S. regional banking ETF, the index is down over 50% over the last few months. PacWest, First Horizon and Western Alliance are some of the latest names to drive index losses this week, but this has been a broader market selloff with short speculators piling in across the entire sector.
There’s a few factors up for debate that are driving the failures of regional banks and the continued speculation in the market of who may be next. At a high level, banks are in a fundamentally different market environment than they have been over the last 10 years and some are failing to manage this regime change.
To name a few factors, the reversal from quantitative easing to quantitative tightening has put increased pressure on shrinking commercial deposits. There’s been increased incentives to keep money in various money market funds over banks as interest rates are much more lucrative. There’s also been mismanagement from banks to navigate the inverted yield curves from one of the fastest rate hiking cycles in history, which has had a significant impact on their business. Higher rates have now put pressure on new economic activity and credit growth, which has been turning over since August 2022. Add in the new speed at which bank runs and insolvency speculation can take shape and we have a simple, crude way of understanding why this is happening.
The below chart shows that banks’ deposit base and overall health has been strengthened over the last decade with the help of the Federal Reserve but now that trend is reversing.
Source: Hussman Strategic Advisors
The below chart shows the annual change in commercial bank credit which has been turning over since August 2022.
During the month of April this year, and at the height of the first few banking failures, a Gallup poll shows that Americans haven’t been this concerned about the safety of their money deposits since the Great Financial Crisis in 2008.
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The reasons bank runs seems to be increasing. 🏃♂️
Why bank stocks have rebounded today. 📈
How FDIC insurance isn’t enough to protect depositors. 🕳️