The United States is currently experiencing a protracted bank crisis. More importantly, several on-chain data suggest that the crisis may not be over soon, which would destabilize the nation’s financial ecosystem.
The Gravity Of The Crisis
Recent data reveals an alarming trend of plummeting deposits amidst an unprecedented level of support from the Federal Reserve, leading to mounting concerns about the resilience of the country’s financial institutions. The Kobeissi Letter, a reputable macroeconomic commentary outlet, shed further light on this development:
American banks are grappling with their most substantial weekly deposit outflows since the collapse of Silicon Valley Bank. According to The Kobeissi Letter, this alarming revelation is a stark reminder of the gravity of the situation.
Total bank deposits, adjusted for seasonal variations, recorded an astounding drop of over $70 billion in one week. This plunge now places bank deposits at their lowest level since May, leading to doubts over whether there was an adequate resolution of the regional banking crisis.
Market analyst Joe Consorti further reinforces this data, adding that US commercial banks suffered a loss of $71.2 billion in deposits in the preceding week. He also provided a sobering historical context, pointing out that had this transpired in 2008, it would have ranked as the third-largest outflow during the Great Financial Crisis.
Nevertheless, Consorti maintains that the current scenario only ranks as the eighth-largest since the banking panic of March 2023 and hints at more turbulent times ahead. Consorti also shed light on a consequential shift in deposit allocation patterns.
He said 60% of current fund outflows are into High-yielding, Secure, and liquid money market funds. These funds promise returns of 4.5% or more, surpassing the offerings of traditional banks.
This dynamic attests to a broader sentiment of apprehension and a quest for safer investment avenues amid the prevailing uncertainty.
Unrealized Losses And Federal Reserve’s Intervention
Data further shows that unrealized losses are also affected as securities held by FDIC-insured commercial banks rose to $558 billion in the second quarter. However, these banks registered a surge of $43 billion, constituting an 8% escalation during this period.
This vast sum is predominantly composed of Treasury and government-guaranteed mortgage-backed securities. Meanwhile, analysts anticipate even more significant unrealized losses for the third quarter due to the upward trajectory of the 10-year US Treasury yields.
Simultaneously, the Federal Reserve’s Bank Term Funding Program (BTFP) has soared to an unprecedented peak, reaching $107.8 billion, as indicated by data from the St. Louis Fed. Launched in March 2023, the BTFP was strategically designed to inject additional funding into troubled depository institutions.
Meanwhile, the Kobeissi Letter further revealed that there has been a surge in the utilization of the Fed’s emergency bank funding facility, further underscoring the gravity of the crisis. Last month, finance credit ratings platform, Moody’s, downgraded several banks while issuing ominous warnings of potential downgrades for others.
Accordingly, it becomes increasingly apparent that the regional banking crisis in the United States is still in its initial stages, leading to uncertainty regarding the stability of the nation’s finance ecosystem. Hence, there is a need for a vigilant and collaborative effort from financial regulators, institutions, and policymakers to find the right solution to these issues and ensure long-term stability within the banking sector.