The current banking crisis isn't a sudden panic run. Instead, it's a 'bank walk,' where deposits consistently move out of regional banks into higher-yield money market funds. This slower, sustained outflow creates a protracted crisis that unfolds between quarterly reports, masking its severity.
Related Insights
The Federal Reserve encouraged banks to buy long-term treasuries while signaling low rates, only to then hike rates at a historic pace. This action decimated the value of those bonds, making the world's 'safest asset' the riskiest and directly triggering bank collapses like Silicon Valley Bank.
Quantitative Easing (QE) forced massive, often uninsured deposits onto bank balance sheets when loan demand was weak. These deposits were highly rate-sensitive. When the Fed began raising rates, this "hot money" quickly fled the system, contributing to the banking volatility seen in March 2023.
Drawing from his time at the US Treasury, Amias Gerety explains that recessions are about slowing growth. A financial crisis is a far more dangerous event where fundamental assumptions collapse because assets previously considered safe are suddenly perceived as worthless, causing a "sudden stop" in the economy.
The recent uptick in the Fed funds rate was not a direct signal of scarce bank reserves. Instead, it was driven by its primary lenders, Federal Home Loan Banks, shifting their cash to the higher-yielding repo market. This supply-side shift forced borrowers in the Fed funds market to pay more.
Recent increases in funding market spreads suggest banking reserves may be too restrictive. This puts pressure on the Federal Reserve to end its balance sheet runoff (QT) sooner than its official timeline, creating a potential for market disappointment if the Fed delays its decision.
The SVB crisis wasn't a traditional bank run caused by bad loans. It was the first instance where the speed of the internet and digital fund transfers outpaced regulatory reaction, turning a manageable asset-liability mismatch into a systemic crisis. This highlights a new type of technological 'tail risk' for modern banking.
The massive amount of cash in money market funds isn't from investors selling equities. Instead, it's a direct result of high government interest payments creating a 'cash bubble.' This capital is likely to be forced into risk assets as rates decline, providing significant future fuel for the market.
While the 2008 crisis centered on commercial banks and mortgages, today's problem is rooted in the central banks themselves. The Fed's policies actively devalued US treasuries—the bedrock of the system—making this a more fundamental central banking and currency crisis, not just a banking one.
While post-GFC regulations targeted "too big to fail" institutions, their primary victim was the community banking sector. The new regime made it "too small to succeed," causing half of these banks to disappear. This choked off credit for small businesses and real estate, hindering Main Street's recovery.
Banks started in the 80s and 90s are led by founders nearing retirement. With no new generation of talent eager to run small, three-branch banks, these institutions are increasingly looking for an exit. This succession problem is a primary driver of M&A activity in the sector.
