IPC Community Exclusive: The Ongoing Banking Crisis

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On May 1, First Republic Bank became the latest addition to the growing list of failed banks, making it the third major bank to collapse in recent months. Previously the 14th largest bank in the United States, First Republic Bank now holds the unenviable title of being the second largest bank failure in U.S. history. Silicon Valley Bank, which was the 16th largest bank in the country, and Signature Bank, the 29th largest bank in the U.S., also collapsed recently. These two bank failures mark the third and fourth largest bank collapses in history. Since the 1970s, more than 90 banks with assets over $1 billion have failed in the United States. Three of the four largest collapses have occurred in the past few months.

In light of recent U.S. bank failures and a significant surge in interest rates, depositors have hastened withdrawals from commercial banks. Bank deposits have fallen about 3.5%, or over $600 billion, since the start of the year. Small banks have seen deposits decline roughly 4.4%, or nearly $250 billion, since the beginning of the year.

Depositors have been moving bank deposits from low-interest-bearing bank deposits to money market funds which offer higher yields. Money market holdings have risen over $160 billion since the start of the year and are up nearly $400 billion since the Federal Reserve began raising rates in early 2022. The effective Federal Funds rate has risen nearly 500 basis points since the Federal Reserve began raising rates in March 2022. Money market rates have risen sharply over this time while interest rates for savings accounts have remained muted. The spread between interest-bearing bank deposits and money market funds is likely to remain wide and, as a result, deposit outflows are unlikely to reverse.

The outflow of deposits limits both the ability and willingness of banks to offer loans. Moreover, financial institutions are becoming more cautious given both the volatility in the banking system and the broader economic uncertainty. Banks are reporting tighter lending policies and this trend is likely to continue in the months ahead as their risk tolerance continues to diminish.

To read the rest of this article, which appeared in the Summer 2023 issue of IPC Community, click here.