In the ancient Roman calendar, the Ides fell on the fifteenth of each month, and March 15 marks the day in 44 B.C. when the Roman emperor Julius Caesar was assassinated by conspiring colleagues in the Senate.
The days around the Ides of March 2024 pose a threat to the banking sector, which risks the second and more serious phase of the banking crisis that began one year ago with the collapse of Silicon Valley Bank (SVB). The underlying problems uncovered last year in the U.S. banking system, especially among the regional and smaller community banks, have not been resolved but have only grown worse. The issues include the inability to raise deposit funding, increased dependence on emergency government funding, unrealized losses on securities portfolios, and growing losses on loans to the commercial real estate sector and the beleaguered consumer.
The year 2023 saw three of the four largest bank failures of all-time—SVB, First Republic, and Signature Bank—representing a combined asset base of more than $500 billion, as well as the forced merger of Switzerland’s venerable Credit Suisse ($600 billion of assets) with its primary competitor, UBS. The credit ratings agencies such as Moody’s subsequently downgraded a number of U.S. banks, including the now too-big-to-fail (TBTF) U.S. Bank (another $664 billion of assets).
At the time, both U.S. Treasury Secretary Janet Yellen and JPMorgan CEO Jamie Dimon publicly stated that the U.S. banking system was sound and implied that the events were not systemic but isolated to the specific banks in question. The markets were not convinced, however, and investors and depositors continued to exit regional banks in the following months. Over the past year, a period in which the broader equity indexes have soared to all-time highs, regional bank stocks have continued to languish and remain below year-end 2022 levels. While the S&P 500 Index has gained more than 7 percent year to date, an index of the regional banks is down by more than 5 percent in 2024, showing that investors remain wary.
Since 2022, depositors have taken out more than $1 trillion from the U.S. banking system. A steady outflow turned into a deposit run following the collapse of SVB. To staunch a systemic liquidity drain, the Federal Reserve intervened and introduced an emergency borrowing facility called the Bank Term Funding Program (BTFP). The program had a one-year authorization; it was set to expire on March 11. The program was intended to give the banks time to restore normal deposit-gathering operations. However, instead of gradually weaning off of their dependence on government funding, the banks have doubled their use of the BTFP over the past year.
The Fed announced on Jan. 24 that the BTFP would expire as planned despite utilization having peaked at $167 billion that same week. The Fed was seeking to demonstrate that the “unusual and exigent circumstances” (i.e., emergency conditions) of March 2023 had been resolved and that circumstances were going back to business as usual. Yet one week later, the policy-making Federal Open Market Committee minutes removed the previous boilerplate language that read: “The U.S. banking system is sound and resilient.” This was a warning that the markets largely ignored.
As recently as last month, utilization of the BTFP by U.S. banks remained near an all-time high at more than $163.5 billion, compared with peak utilization of $79 billion in the midst of the banking crisis in April 2023. This is surprising given that, at 5.4 percent interest, the BTFP is relatively expensive compared with deposit funding. While no new loans can be advanced after March 11, outstanding loans have up to one year from the date of the advance to be repaid. Banks that are borrowing under the BTFP this month are sending a signal that they are struggling to find financing on market-related terms that won’t upend their profitability and deplete capital.
The big banks are in a different position. For the first time in decades, it is now profitable for the TBTF money center banks to park their cash with the Federal Reserve. For most of the period from 2008–09—i.e, since the global financial crisis, through the COVID-19 lockdown-induced recessionary years—interest rates paid on reserve deposits were only slightly above zero. However, since July 2023, the Federal Reserve has been paying the TBTF banks 5.4 percent for their reserve deposits held at the Fed.
As a result, reserve balances have more than doubled—from $1.6 trillion in February 2020 to $3.6 trillion at the end of last month. The TBTF banks can’t believe their luck. This is a lot easier and less risky than the pesky business of lending. The smaller community and regional banks have lower excess liquidity, higher funding costs, and limited access to the Fed discount window, and thus less ability to profit from the Fed’s willingness to run losses and move ever closer toward insolvency. The Fed’s cumulative losses since September 2022 of more than $133 billion largely accrued to the benefit of the TBTF banks, a crony capitalism largesse that will ultimately be paid for by the U.S. taxpayer.
Coincidently, on the Ides of March 2020, the Federal Reserve announced a reduction in reserve requirements for U.S. banks to zero. In other words, banks are no longer required by their primary regulator to keep any cash whatsoever on hand to meet depositor demand. Prior to this change, the reserve requirement for net transactions accounts was either 3 percent or 10 percent, depending on the account balance. Under a fractional reserve system, banks never had adequate cash on hand to meet a sudden surge in demands for withdrawals of customer deposits, but now the banks—with regulatory blessing—are not even making the pretense.
If there is another deposit run, the Fed, coordinating with the U.S. Treasury, will simply create additional money out of nothing, then push the cash into the system as required to meet depositor demands. But this isn’t real or honest money. It will simply add on to the U.S. federal government’s debt, already standing at a staggering $34 trillion and growing by $1 trillion every three months or so. Americans will once again pay the price through the hidden tax of inflation and resulting loss of purchasing power.
On Sept. 30, 2023, the banking system had an estimated $1.5 trillion in unrealized losses on their securities portfolios and loan books. If these losses were marked to market and applied against bank capital, a large majority of loss-absorbing capital would be devoured, and the banking system would be substantially undercapitalized. While some banks are healthy and others not, on the whole, the system is weak and at risk. In summary, there is not enough capital in the system to absorb growing losses, and there is not enough liquidity to confront another deposit run.
The outcome could be a crisis that eclipses in size the global financial crisis of 2008–09, and a required level of government intervention that looks a lot like nationalization of the banking system. What is inevitable in such a scenario is the gross debasement of the U.S. dollar’s purchasing power as trillions of new funny money is created out of thin air to prop up the financial system.
