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The banking crisis is not over. But how bad can things go?

2023-05-05 09:52:00, Ekonomi CNA

Uncertainty continues to plague the banking industry, despite assurances given this week by financial regulatory bodies or well-known bankers that the worst of the recent crisis is over and that the health of the banking system remains strong.

This week, after being seized by the government, First Republic Bank was taken over by JPMorgan Bank. First Republic's bankruptcy was the second-largest in US history and the third of a mid-sized lender in two months.

While many thought the sale of First Republic Bank would end the "which bank's next?" debate, investors continue to focus on the remaining "players," considered the weakest in the system.

The biggest concern is that bank failures could lead to the raising of doubts about relatively healthy banks, creating a 'financial contagion', which could affect the wider economy. Avoiding this scenario was the reason that in the country, stronger restrictions were imposed on big banks, after the financial crisis of 15 years ago.

At present it is difficult to ignore the feeling of uneasiness associated with banks. There's no need to worry, however, if the money is in a bank insured by the federal Deposit Insurance Agency and you have less than $250,000 in the bank, which covers most accounts.

Bankers and regulators have tried to reassure investors that the worst of the crisis is over, but to no avail. JPMorgan banker Jamie Dimon said Monday that he believed "this part" of the banking crisis was over. The chairman of the Federal Reserve, Jerome Powell, guaranteed on Wednesday that the financial system is healthy.

After renewed selling efforts on Thursday, attention focused on PacWest Bancorp and Western Alliance Bancorp, two smaller regional banks whose shares have been under pressure since the bankruptcy of the Silicon Valley bank, amid of March, which caused the current crisis. The value of PacWest Bank fell 51% after admitting it was considering a sale.

PacWest was targeted because of a high concentration of large, unsecured deposits from venture capital firms or startup funds, as well as technology clients, the same type of clients that drove Silicon's bankruptcy. Valley' and 'First Republic'. Analysts at investment bank UBS estimate that about 23% of PacWest's deposits come from venture capital and technology firms.

But Comerica and KeyCorp banks have also fallen by more than 20% this week. This may be a reflection of growing concerns about large amounts of real estate loans, especially in the office property market, which continues to suffer the effects of the pandemic.

PacWest, based in Los Angeles, and Western Alliance, based in Phoenix, each issued a statement overnight, saying they were not facing any deposit withdrawals beyond the normal withdrawals following the sale of First Republic Bank. Both banks faced significant withdrawals after the bankruptcy of the 'Silicon Valley' bank. But banks say deposits have increased since March 31.

Western Alliance issued a separate statement on Thursday morning denying an article in The Financial Times newspaper that said the bank was considering a sale. Its shares fell 38%.

Investors fear that the fate of PacWest Bank may be the same as that of First Republic, which spent weeks looking for a buyer before going bankrupt. First Republic also had a wealthy clientele, many of whom quickly withdrew their deposits when Silicon Valley failed.

"The fundamental issue, especially at these banks, is that their mix of properties and deposits is not sustainable," said Chris Caulfield, a banking industry consultant who works for West Monroe.

In another signal of potential trouble, a major deal in the banking sector was canceled on Thursday. TD Bank Group and First Horizon Corp. announced they canceled a planned merger, citing regulatory hurdles. Toronto-Dominion Bank announced in February that it was buying regional bank First Horizon in a $13.4 billion deal in hard cash.

The Federal Reserve's battle against inflation has played a key role in the banking woes the country is experiencing. The Federal Reserve on Wednesday raised the key interest rate by a quarter point, or 0.25 percent, to the highest level in 16 years, the tenth consecutive rate hike.

Frequent interest rate hikes over the past year have begun to slow the economy, and a number of economists expect an economic downturn in late 2023 or early 2024./ Voa