American banks want help from the state
IInterventions by big banks and appeasement by the US government have so far not been able to overcome the mistrust of investors and bank customers in America’s smaller financial institutions. The First Republic financial institution, which was targeted after the collapse of the Silicon Valley bank, lost around a third of its market value on Friday – despite a concerted action by 11 major banks: They had invested $ 30 billion in the bank on Thursday. This should prepare First Republic for an onslaught of customers withdrawing their money.
A coalition of medium-sized banks has meanwhile called on the American government to fully guarantee the customer deposits of the smaller institutes for the next two years. Reported about a corresponding letter Bloomberg.
The state deposit insurance FDIC has so far only guaranteed deposits of up to $250,000, but last weekend it had a guarantee for all deposits of the collapsed institutes Silicon Valley Bank and Signature Bank assured. The banking coalition, which has more than 100 members and total assets of at least $20 billion, is facing a customer flight.
Warren Buffett in conversation
Many customers apparently transfer their accounts to major banks such as JP Morgan, Wells Fargo or Citibank. State intervention is necessary to regain trust. In the letter, she refers to the statement by the finance minister Janet Yellenthat only institutions could count on a full guarantee for the balances that would be classified as systemically important.
In a hearing at the US Senate Treasury Committee last week, Yellen tried to boost trust in the financial sector: “I can assure the members of the committee that our banking system is healthy and that Americans can have confidence that their funds are available when they are needed.” She pointed out that banks are getting short-term loans from a fund set up after the collapse of the Silicon Valley bank Federal Reserve can get.
According to consistent media reports, the White House is in talks with the investor Warren Buffett about a cash injection for medium-sized banking institutions. In 2008, Buffett gave Goldman Sachs a $5 billion capital injection at the height of the financial crisis at the time, and in 2011 he supported the ailing Bank of America with capital. Both investments have been exceptionally lucrative for Buffett.
Democrats against Goldman
Meanwhile, Democratic politicians from California are taking the investment bank Goldman Sachs targeted. The management of the Silicon Valley bank approached the investment bank at the end of February with the concern of strengthening the financial situation in view of an impending downgrade by the rating agency Moody’s. Goldman was formulating a plan to generate liquidity and acquired a portion of the $21 billion book value bond portfolio at a negotiated discount. The sale resulted in a $1.8 billion loss at Silicon Valley Bank. When this became known, the customer rush began.
Politicians are now calling on regulators to examine the investment bank’s dual role as adviser and buyer. One line of public criticism has centered on the Federal Reserve’s role as bank regulator and why it had not paid more attention to apparent interest rate risks on banks’ balance sheets. After the turnaround in interest rates, supposedly safe bonds in the banks’ portfolios lost value dramatically.
According to the FDIC, most banks had so-called unrealized losses on their balance sheets, which totaled $620 billion in 2022. This is the difference between the accumulated book value of the bonds and their market value.
Economists at the Kansas City Federal Reserve warned last fall that important capital ratios of so-called community banks had plummeted. Central banker Michael Barr, responsible for financial supervision, announced last week that he would take stock of the role of the Federal Reserve.
The Fed meets every week for its regular meeting. The financial markets are now speculating on whether there will be no further interest rate hike at all or whether the rate increase will be limited to 0.25 percentage points.