Savings rate: After a slew of bank failures, is the worst turmoil in the industry behind us?
Zachary Halaschak
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It has been over two months since Silicon Valley Bank failed. Since then, several other banks have met their demise. But with the industry largely stabilized, is the crisis already over?
The most recent bank to fade into the sunset was First Republic Bank. First Republic was a regional bank that circled the drain for weeks following the collapses of both SVB and crypto lender Signature Bank. This month, it was announced that First Republic was being taken over by the Federal Deposit Insurance Corporation and was then purchased by JPMorgan Chase.
MORE REGIONAL BANKS UNDER SIEGE IN WAKE OF FIRST REPUBLIC FAILURE
Some saw the absorption of First Republic as the beginning of the end of the banking crisis. But there are still several regional banks that are flailing in the fallout of SVB’s failure. Robert Van Order, professor of finance and economics at George Washington University, told the Washington Examiner that he thinks that the worst of the banking system turmoil is now in the rearview mirror, albeit regional banking woes haven’t yet ended.
“It’s not clear exactly what’s in the rest of the banks’ portfolios, so there may be more banks that go under,” he said, although he added that the risk from big systemic problems and bank runs has greatly declined.
Van Order pointed out that there are big differences between what happened with SVB and the situations of many other banks. An enormous share of SVB’s deposits — in the order of 95% — were uninsured, meaning that the deposits were in excess of $250,000.
“So, in a sense, it was a different sort of bank. Most banks have nowhere near that [number] of uninsured deposits, and so people were worried,” he said.
SVB’s collapse marked the biggest bank failure since the 2008 financial crisis, and federal regulators acted quickly to clean up the mess.
Amid growing panic from depositors and investors fearing the collapse could evolve into a full-on banking crisis, the government quickly announced that all of SVB’s depositors would be made whole, even those who banked in excess of the federally insured $250,000. The Fed also formed the Bank Term Funding Program as a new source of funding for banks that might face depositor runs.
Desmond Lachman, a senior fellow at the American Enterprise Institute, said that going forward, it is unlikely the U.S. will experience a sudden and dramatic collapse featuring investors all trying to pull their money out of banks, like what happened during the SVB collapse. That is because the federal government has effectively shown that it is safeguarding uninsured deposits.
“I don’t think you’re going to get a run on the banks as we had with Silicon Valley Bank and Signature Bank, but the regional banks are going to have trouble,” Lachman told the Washington Examiner.
He said the tumult in regional banks is in large part because they have too much of their loan portfolios in the real commercial property sector. Lachman noted that the sector is having trouble right now, so because there are more defaults on those debts, those banks will come under pressure.
“I think that the term one would use is it’s going to be a slow-rolling regional bank crisis,” he said. Lachman added that he thinks there will be other regional banks going under before the situation is wrapped up.
There will be an increasing number of deposits flowing from these smaller banks into the big banks such as JPMorgan. And as a result, more of the smaller banks will end up getting consolidated, akin to what happened with First Republic earlier this month, Lachman said.
But the situation in the banking system also has broader implications for the economy. Right now, the Federal Reserve is in the midst of a historic tightening cycle. The Fed has been raising interest rates for more than a year in order to drive down inflation, although the downside of doing so is the risk of recession.
The turmoil in the banking system further complicates the economic landscape and has raised the odds that the economy will fall into a recession, which could mean the unemployment rate rising and gross domestic product growth shrinking.
“That’s really a key part of it,” Lachman said about how the bank failures tie into the probability of a broader economic downturn.
Indeed, after SVB’s collapse, projections for how high the central bank will raise its federal funds rate, now sitting at 5% to 5.25% as of the May rate hike, quickly plunged.
Investors assign about a 98% chance that the Fed will pause rate hiking at its June meeting, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
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Additionally, the consensus among investors is that the Fed will begin slashing rates later this year in an effort to pull off a much-desired “soft landing,” which means inflation is meaningfully driven down while a recession is averted. A mere 1% of investors are betting that rates will be as high as they are now or higher come November.
Still, many economists think the chance of a mild recession is still high. Former Treasury Secretary Larry Summers recently pegged the odds at 70% in the next year, the Conference Board’s Leading Economic Index suggests a recession will hit sometime in the middle of the year, and the Fed’s probability modeling indicates about a 68% chance of a recession in the next 12 months.