A perfect storm is now hitting U.S. banks. New data reveals that the same distortions that preceded the Lehman collapse in 2008 and the failures of four major U.S. banks earlier this year are currently affecting hundreds of institutions, and creating a crisis that will impact our personal finances, thousands of U.S. businesses, and put the economy and financial markets at serious risk.
Current problems in the banking system are reviving uncomfortable memories of the global financial crisis, and the risks of widespread bank failures are higher than at any other period. That’s why Wall Street analysts are pointing the finger of blame to regulators once again. In a recent analysis published on Parade.com, financial experts Pam and Russ Martens exposed that U.S. regulators and the central bank are withholding important information about the real financial condition of several large financial institutions for over a year and a half not to alarm the public, and spark more bank runs and failures.
They discovered that on March 30, 2022, the Fed reported that unrealized losses on available-for-sale securities at the 25 largest U.S. banks were approaching the levels they had reached during the financial crisis in 2008. On that same day, the central bank stopped reporting data about the bank’s unrealized gains and losses on securities. It can’t be just a coincidence that this data series was halted right after the Fed started raising rates on March 17, 2022.
That made things exponentially worse for U.S. banks because they had loaded up on low-interest-rate Treasury securities and federal agency Mortgage-Backed Securities. They did so because their deposit balances had swollen to a historic level as a result of the trillions in stimulus payments that the federal government directly deposited into depositor accounts at banks during the health crisis. Back then, the pandemic led to mass business closings which negatively impacted business loan demand and made banks turn to government-backed bonds as a safe place to park the trillions of dollars in extra deposits. But these lost a good deal of value as interest rates were increased. Lenders ended up with paper losses, leaving investors unimpressed.
At this moment, nearly 200 banks are in danger of suffering the same woes as Silicon Valley Bank. If just 10 small and mid-sized banks fail in the months ahead, that could trigger a cascade of failures and that would bring down larger banks as well. In turn, a major credit crunch would make it impossible for businesses and consumers to access credit. In fact, a credit crisis is already in motion. Last week, bank credit fell further on a year-over-year basis. Meanwhile, corporate and personal bankruptcies are already spiking, and so are consumer debt delinquencies.
Many Americans already report that their access to credit has deteriorated in 2023, and they shouldn’t expect a reversal any time soon. On top of all that, more bank failures would certainly cause more bank runs on these vulnerable financial institutions, damaging confidence in the banking system and causing a broader panic. Ultimately, when lending dries up, that will weigh on the value of stocks, real estate, and other assets, and crimp overall demand — a recipe for a disastrous recession and the worst financial crisis in our lifetimes, just as the experts have been warning all along.