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It has been nine months since the spectacular and sudden collapse of Silicon Valley Bank, the largest bank failure since the financial crisis of 2008.
In the wake of experiencing three of the four largest bank failures in U.S. history in 2023, the focus of both the media and the financial markets has shifted elsewhere. The recent banking crisis appears to have faded into the background, with the NASDAQ Bank Index rebounding by nearly 40% since its March low and now hovering within 15% of its pre-crisis peak in January. Despite the apparent recovery in various markets, including bank stocks, it’s clear that the banking sector is not in great shape.
The concerning trend banks have faced throughout 2023 is a consistent loss of deposits. According to data from the Federal Deposit Insurance Corporation, U.S. banks have witnessed a decline in deposits for six consecutive quarters. Although the rate of decline has dwindled since the first quarter of 2023, which saw the removal of nearly $500 billion in deposits from the banking system, approximately $190 billion has been withdrawn in the last two quarters alone. Notably, U.S. banks have experienced a net loss of $1.1 trillion in deposits since the commencement of 2022, coinciding with the rise in interest rates.
Facing a scarcity of customer deposits, U.S. banks are increasingly reliant on emergency funding sources from the Federal Reserve Banks and the Federal Home Loan Bank system. FHLB bond capital raising, utilized to fund banks, has surged by 89% year over year through November, reaching $1.1 trillion by the end of 2023. Also, the employment of the Bank Term Funding Program, an emergency facility established by the Fed in March 2023, reached an unprecedented high totaling $131.3 billion. This surge is indicative of a disruption in normal market operations, signaling that the bank funding markets are not functioning optimally and necessitating regulatory intervention to support the stability of the system.
Banks are grappling with challenges on the asset side as well, as unrealized losses on investment securities continue to escalate. In the third quarter of 2023, U.S. banks reported unrealized losses exceeding $684 billion, marking a 22 percent increase from the second quarter. Within these losses, $294 billion is attributed to securities categorized as available for sale, indicating that the bank does not intend to hold the asset to maturity but hopes to recapture its value by the end of the term.
Across the banking system, net income is on a declining trajectory, especially evident among smaller community banks. Although credit quality is experiencing deterioration, it has not yet reached a crisis level. Notably, the surge in problem loans is primarily driven by challenges in the commercial real estate sector.
To counter the decline in deposits, banks are compelled to offer rates that are competitive with money market funds, ensuring positive real returns for depositors. With inflation persisting in the 3–4 percent range, this implies that banks will need to offer rates in the 4–5 percent range to remain relevant. However, this approach poses a significant challenge for banks as it threatens their profitability. Moreover, it presents a dilemma for the U.S. Treasury, which is committed to trillion-dollar deficits each quarter and must also offer interest rates that surpass investor perceptions of inflation and address the deteriorating fiscal condition of the U.S. government. Finding a sustainable solution in this complex financial landscape remains a pressing concern for both financial institutions and government entities alike.
If funding costs continue to rise or if unrealized losses materialize, banks face the prospect of capital level reductions, causing concern among markets and depositors and potentially triggering a second round of deposit runs. In a preemptive move to address these challenges, some banks are exploring mergers, with 78 bank deals announced in the latter half of 2023, primarily involving smaller and community banks. However, the efficacy of this strategy is questionable in an already failing system.
The looming risk of additional bank failures in 2024 is a distinct possibility. Financial institutions are actively implementing measures to control expenses and safeguard their earnings. In this climate, investors are actively seeking alternative assets to hedge against the uncertainties in the banking industry. Amidst the fluctuations, gold stands out as a tangible asset unaffected by these dynamics. Unlike the banking sector, gold does not face the risk of bankruptcy. Consider bolstering the diversity of your financial portfolio by exploring investment opportunities in gold as a stable and resilient asset in these unpredictable times.
Connect with Reagan Gold Group when navigating the world of precious metals. We provide gold and silver investment solutions tailored for challenging economic climates and heightened international tensions. Contact Reagan Gold Group today to explore how incorporating physical gold and silver into your portfolio can hedge your financial future. Book a FREE consultation today investors across the centuries by purchasing precious metals, knowing that you have made a decision that history has shown many positive benefits and peace of mind.
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