Famed investor Bill Ackman is warning that America’s regional banking system is at risk and criticized the Federal Deposit Insurance Corporation (FDIC) for worsening the banking crisis facing the nation.
First Republic Bank (FRB) “would not have failed if the FDIC temporarily guaranteed deposits while a new guarantee regime were created. Instead, we watch the dominoes fall at great systemic and economic cost.”
Ackman, the CEO of investment advisor Pershing Square Capital Management, predicted that no regional bank will be able to survive “bad news or bad data” in an environment of no confidence in the banking sector. Stock prices will plunge, insured and uninsured deposits will be withdrawn, and the banks will end up getting shut down by the FDIC, he stated.
Global systemically important banks have an “unfair advantage” as they are deemed too big to fail. Until the playing field is leveled, the regional banks are at “grave risk”
“Confidence in a financial institution is built over decades and destroyed in days. As each domino falls, the next weakest bank begins to wobble. Until investors are rewarded for betting on a wobbling bank, there will be no bid, and the best sale is the last price,” he said.
Banks Under Stress
Ackman’s warning comes amid worries about another bank failure. The collapse of First Republic Bank on May 1 made it the third American bank to fail this year.PacWest Bancorp has now become the focus of attention as investors remain concerned about the health of U.S. banks. Shares of the bank are down by around 30 percent year to date as of May 4.
PacWest has already confirmed that multiple investors have approached it and that the bank is considering its options.
The KBW Nasdaq Regional Banking Index is also down by around 30 percent. The index reflects the performance of U.S. companies that do business as regional banks.
In a recent note, Morgan Stanley predicted that the banking crisis will eventually result in “credit shocks” that will negatively affect economic growth.
Fed Rate Hikes
In a statement to The Epoch Times, Daniel Lacalle, chief economist at hedge fund Tressis, said that the profitable asset base of U.S. banks has been “destroyed by years of negative real rates.”Negative real rates occur when the nominal interest rates charged by banks on loans are lower than the rate of inflation, which makes making profits tough for these banks.
On May 1, a group of lawmakers wrote a letter to Federal Reserve chairman Jerome Powell expressing worries about the Fed’s policy of raising interest rates.
“We write regarding our concern about the Federal Reserve’s monetary policy strategy and its potential to throw millions of Americans out of work,” the letter said.
“We strongly urge you to respect the Fed’s dual mandate, pause your rate hikes, and avoid engineering a recession that destroys jobs and crushes small businesses.”
Despite the letter, the Fed raised interest rates by an additional 25 basis points on May 3, pushing up its benchmark rate to a range of 5.0–5.25 percent, which is the highest level since September 2007.
