A looming financial crisis? : Now American banks are crying out to the state for help

IThe intervention of big banks and appeasement by the US government has so far failed to overcome the distrust of investors and banking customers in America’s smaller financial institutions. The First Republic financial institution, targeted by the collapse of the Silicon Valley bank, lost about a third of its market value on Friday – despite the concerted action of 11 major banks: they injected $30 billion into the bank on Thursday. This should prepare First Republic for an onslaught of customers withdrawing their money.

In the meantime, a coalition of medium-sized banks called on the US government to fully guarantee the deposits of clients of small institutions for the next two years. It is reported by Bloomberg.

The state-owned deposit insurance company FDIC has so far only guaranteed assets up to $250,000, but last weekend it guaranteed all the assets of the bankrupt institutions Silicon Valley Bank and Signature Bank. The banking coalition, which has more than 100 members and total assets of at least $20 billion, is in danger of fleeing customers.

Warren Buffett in conversation

It is obvious that many clients transfer their accounts to large banks such as JP Morgan, Wells Fargo or Citibank. State intervention is necessary to restore confidence. In the letter, she refers to Treasury Secretary Janet Yellen’s statement that only institutions that are classified as systemically important can expect full guarantees on their assets.

In a US Senate Treasury committee hearing last week, Yellen tried to build confidence in the financial sector: “I can assure committee members that our banking system is healthy and that Americans can be confident that their funds are available when they are. She indicated that banks can get short-term loans from the Federal Reserve Fund, created after the collapse of the Silicon Valley banks.

According to constant media reports, the White House is in talks with investor Warren Buffett about a cash injection into mid-sized banks. In 2008, Buffett provided Goldman Sachs with a $5 billion capital injection at the height of the financial crisis of the time, and in 2011 he backed the ailing Bank of America with capital. Both investments were exceptionally profitable for Buffett.

Democrats vs. Goldman

Meanwhile, California Democratic politicians have set their sights on investment bank Goldman Sachs. The management of the Silicon Valley bank turned to the investment bank at the end of February with concern about the strengthening of the financial position in connection with the upcoming downgrade by the rating agency Moody’s. Goldman was developing a plan to create liquidity and purchased a portion of a $21 billion bond portfolio at an agreed discount. The sale resulted in a $1.8 billion loss for Silicon Valley Bank. When this became known, the buying frenzy began.

Politicians are now urging regulators to look into the investment bank’s dual role of advisor and purchaser. One line of public criticism has focused on the Federal Reserve’s role as banking regulator and why it has not paid more attention to the obvious interest rate risks on banks’ balance sheets. After the change in interest rates, supposedly safe bonds in bank portfolios lost sharply in value.

Most banks had so-called unrealized losses on their balance sheets, which totaled $620 billion in 2022, according to the FDIC. This is the difference between the accumulated book value of the bonds and their market value.

Last fall, Kansas City Federal Reserve economists warned that important capital ratios for the so-called public banks had plummeted. Central banker Michael Barr, in charge of financial oversight, announced last week that he would take stock of the Federal Reserve’s role.

The Fed meets every week for its regular meeting. Financial markets are currently speculating whether there will be no further interest rate hike at all or if the rate hike will be capped at 0.25 percentage points.