The CEO of one of the largest publicly traded hedge funds has warned that the turmoil sparked by the collapse of Silicon Valley Bank (SVB) is not over and a “significant number” of banks could fail in the next two years.
“It depends on what you define as a crisis; I think that we will have a significant number of banks that will not exist 12, 24 months from now that exist today,” Ellis said.
Asked where the “significant risk” is with regard to some banks potentially failing, Ellis said risk definitely applies to smaller, regional banks in the United States and challenger banks—small, recently established retail banks—in the United Kingdom.
Customers Can Pull Deposits Quickly
“What that means is that at any time of stress, people are going to move their money to one of the banks that they think the government is behind, and that means the deposit base of any of the smaller banks becomes flighty,” he said. “Banking doesn’t work if you haven’t got a stable deposit base as we’ve just seen. And they are naturally less stable now.”Ellis’s comments come after a turbulent few weeks following the failures of SVB and Signature Bank, which saw the government intervene to ensure that the banks’ uninsured deposits are returned to customers.
The market turmoil was further exacerbated when troubled bank Credit Suisse announced on March 14 that it discovered “material weaknesses” in its reporting that would result in inaccuracies in annual financial statements.
Fed Raises Interest Rates
Although there have been growing concerns over a wider market collapse, the latest turmoil appeared not to faze Federal Reserve officials, who on Wednesday voted unanimously to raise interest rates by 25 points, increasing the benchmark federal funds rate to a range of 4.75–5.00 percent.Speaking for the first time since SVB and Signature’s collapse, Fed Chair Jerome Powell said that the U.S. banking system remains “sound and resilient” with “strong capital and liquidity.”
“We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound,” Powell told reporters on Wednesday.
However, the Fed chair added that “events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes” and that it was too soon to “determine the extent of these effects” and how the Fed would respond.
Powell also defended the central bank’s emergency actions to help protect uninsured depositors at SVB and Signature.
“History has shown that isolated banking problems, if left unaddressed, can undermine confidence in healthy banks and threaten the ability of the banking system as a whole to play its vital role in supporting the savings and credit needs of households and businesses,” Powell said.
“We are committed to learning the lessons from this episode, and to work to prevent episodes from events like this from happening again.”
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