Another Bank Bites the Dust (Here We Go Again)

PacWest’s collapse was the fourth major casualty of the biggest crisis to hit the U.S. banking sector since 2008. It rekindled a slide in shares of regional lenders despite regulatory efforts to stave off the turmoil that began with the collapse of Silicon Valley Bank (SVB) in March of 2023.

Houston, we may have a (system) problem!

PacWest Bancorp reported a loss of $1.1 billion attributed to shareholders for the first quarter of the year. Its shares have lost 72% of their value since the start of ’23, making it one of the worst performers on the small-cap S&P 600 regional banks index (SPSMCBNKS), which has lost a third of its value in the same period.

The common theme among the banking stocks that have sold off sharply is that they reported large deposit declines in the first quarter of 2023, said Truist Securities analyst Brandon King, while calling the selloff “overdone.”

When not sure, insure?

To add insult to injury, uninsured depositors represent a significant source of funding for commercial banks, accounting for about half of their deposits and $9 trillion of their liabilities, which can represent a significant risk for these institutions. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity.

The previously collapsed SVB and Signature Bank had some of the highest proportions of estimated uninsured domestic deposits across the entire industry. SVB ranked first among banks with more than $50 billion in assets, with 93.8% of its total deposits being uninsured, while Signature Bank ranked fourth, according to S&P Global Market Intelligence data as of year-end 2022.

A domino effect to try to stop

A report by Hoover Institution elaborated with a group of banking experts assesses that more than 2,315 American banks have assets that fall below the value of their liabilities. What is even more shocking is that nearly half of 4,800 US-based banks have burned through their capital reserves and are now in the negative equity territory.

The common thread that led to the failures was the significant level of unrealized losses in their securities portfolios which, if realized, would take their regulatory capital ratios below well-capitalized levels.

Rattled bank confidence: not a run yet…

Data released on Friday by the Federal Reserve showed the $125.7 billion drop in deposits at all U.S. banks in the week ended March 22 was roughly $50 billion less than the record $174.5 billion outflows in the first week after the collapses of Silicon Valley Bank and Signature Bank.

As a result of these fundamental flaws in the system, “nobody knows where these banks should be trading at because what we saw with Silicon Valley Bank is that the fundamentals can change so quickly,” said Tom Plumb, portfolio manager at Plumb Balanced Fund in Madison, Wisconsin.

“This normally would have been a great opportunity to buy banks with premier regional presence and it may be, but the real concern is nobody knows what the rules are and what they are valued at,” Plumb added.

Still looking for a centralized solution

In a letter to U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler, the lobby group said it had also observed "extensive social media engagement" about the health of various banks that was out of step with general industry conditions.

Federal Reserve chairman Jerome Powell reiterated the banking system remains resilient despite “strains” in March, after the central bank delivered a 25-basis-point rate hike and signaled a pause in its tightening cycle. Powell also said bank deposits had stabilized.

Crypto: don’t let a good crisis go to waste!

The 2008 economic crisis was purely the doing of the fiat world, brought on by mortgage-backed securities, which as it turns out, were not so much backed. The result was a banking crisis turned into an economic one.

Following the 2008 crisis, cryptocurrency emerged offering anonymous, decentralized financial services organized on a peer-to-peer network called a blockchain. Since that time, the cryptocurrency economy has become a multi-trillion-dollar sector with millions of investors pouring their funds into cryptocurrency markets.

A run on crypto?

Both the fiat and cryptocurrency worlds come with their share of risks. Albeit they are distinctly different for each: for the banking sector, it seems to be uninsured assets and centralized manipulation with the money supply, while in the crypto realm, it seems to boil down to unsavory business/exchange practices.

So, is this chain of events currently unfolding in the banking world anything new under the sun? No, not really. Bank runs were a fairly common occurrence during centuries of fiat domination.

It goes without saying that over most of that history, fiat currency has accumulated a huge advantage. As a result, when banks holding peoples’ fiat assets fail, consumers are generally protected. This is not the case when crypto exchanges fail.  What is most damaging when a bank, or several banks in succession, collapse is the ripple effect marked by the erosion of trust in the old system.

On the plus side, every banking crisis serves to open up new opportunities for alternative assets – crypto can help!