Fears about the US banking system won’t go away. Politicians and financiers say all is basically well with the system—but then come repeated emergencies that are a sign of deep fragility.
Three of the four largest banking failures in US history have taken place in just the last two months. Each is dealt with by state action and major players seizing the failed banks’ markets. But the contagion doesn’t stop.
On Monday this week US authorities cleared the way for giant JP Morgan to take over the deposits and assets of First Republic bank which had gone bankrupt.
The move involved a vast payment of corporate welfare. First the Federal Deposit Insurance Corporation, a US government body, had to seize the bank, wiping out shareholders.
Then it persuaded JP Moran to run it—with the “sweetener” of a £10.4 billion handout along with £40 billion of loans. “No buyer would take First Republic without a public subsidy,” said Krishna Guha from banking advisers Evercore ISI.
JP Morgan now holds nearly £2 trillion of US bank deposits, over 14 percent of the total. It is so big that if it hit trouble it would undermine the whole US financial system and the world banking structure.
Banks that already control more than 10 percent of US deposits normally have to get approval from regulators to gobble up further banks. But this was cast aside because the state was so anxious to calm the markets.
The calm was short-lived. The parasites who invest in banks saw First Republic go under, took fright and sold off the shares of similar institutions. That created a market for “short sellers”—who make a profit if the share prices of their targets fall.
One analyst told the Financial Times newspaper, “They are going from the weakest bank to the weakest bank. And it’s not just the short sellers but it’s the customers as well asking if their deposits are safe.”
“The market is focusing on the weakest links and looking for banks that are vulnerable.” Shares in PacWest bank dropped by 28 percent in a day. Further bank failures loom. But this is froth compared with the real crisis.
Ambrose Evans-Pritchard, the Telegraph newspaper’s World Economy Editor, wrote this week, “Almost half of America’s 4,800 banks have already burned through their capital buffers. And are running on negative equity. Somebody will take those losses.”
Professor Amit Seru, a banking expert at Stanford University said, “It’s spooky. Thousands of banks are underwater. A lot of the US banking system is potentially insolvent.”
A group of banking experts calculates that more than 2,315 US banks are currently sitting on assets worth less than their liabilities. They owe more than is in their accounts. The market value of US bank portfolios is almost £2 trillion lower than the stated value.
One of the ten most vulnerable banks is a globally systemic entity with assets of over $1 trillion. Three others are large banks.
Each bank collapse has particular features. But behind all of them is central bankers’ decision in the US and across the world to raise interest rates.
The U-turn brought to an end the era of governments handing out vast amounts of money in quantitative easing to boost profits and keep ailing firms afloat. That would have continued. But governments are now insisting that interest rates must rise in order to crash the economy, shrink the inflation rate and break workers’ attempts to raise wages.
Evans-Pritchard writes that governments and central banks “first created ‘interest rate risk’ on a galactic scale”. “Now they are detonating the delayed timebomb of their own creation,” he writes.
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