From Due Media:

The unraveling of Silicon Valley Bank and the looming threat to regional banks
The banking industry has been under intense scrutiny, with regional banks like Silicon Valley Bank facing crises that have led to significant challenges. New York Community Bank, another regional bank, is now on the brink of disaster, with a 45% stock price drop in just two days. These events highlight the ongoing problems regional banks are grappling with in today’s economic climate.

Understanding the banking system
To grasp why regional banks are struggling, it’s essential to understand how banks handle deposited money. They typically lend it out, use some to buy bonds, and keep the rest as cash. This asset mix means only 10% of the total deposit is kept in cash. This is crucial for when people want to withdraw money from the bank.

The profitability dilemma
Banks are faced with the profitability dilemma. They prefer lending and buying bonds as it generates profits, while keeping cash is not profitable. Traditionally, 10% cash is enough to meet everyday withdrawals and using the rest to generate profits is ideal.

The problem of increased withdrawals
When banks face increased withdrawals, they must look at other sources to generate cash because keeping cash is not profitable. However, current economic challenges complicate the strategy of selling bonds for cash. The Federal Reserve’s increased interest rates have led to decreased bond prices, making it hard for banks to sell bonds for the money they initially thought.

The impact of delinquencies in commercial real estate
Increased commercial real estate business delinquencies have compounded the banks’ woes. Adjustable-rate mortgages and increased Federal Reserve interest rates mean mortgage payments are more expensive. This is a problem for real estate owners with decreasing rents.

The pressure on banks
All this leads to banks facing intense pressure because they are losing money on their deposits and bonds, and they have a lower-quality book of loans. The downfall of Silicon Valley Bank and the looming threat to New York Community Bank are dire reminders of the problems plaguing the banking industry.

Frequently Asked Questions
– What led to the downfall of Silicon Valley Bank?
Silicon Valley Bank encountered a significant crisis due to pressure on the banking industry, particularly regional banks.
– What are the three things a bank typically does with deposited money?
Banks typically lend it out, use some to purchase bonds, and keep the rest as cash, with the majority used for lending and buying bonds.
– Why do banks face a profitability dilemma?
Banks face a profitability dilemma because keeping large amounts of cash is not profitable, so they prefer to allocate money to lending and buying bonds, which generate profits.
– What problems arise when banks face increased withdrawals?
When banks face increased withdrawals, the amount of cash on hand decreases, forcing the bank to look at other sources to generate cash. The increased interest rates complicate selling bonds for cash.
– How does the increase in delinquencies in commercial real estate impact banks?
The increase in delinquencies in commercial real estate means banks have to set aside more money for loan loss reserves, essentially insurance against bad loans.
– Why are regional banks under pressure?
Regional banks are under pressure due to the Federal Reserve’s historic interest rate increases, and they face a lower-quality book of loans, leading to losses on their deposits and bonds.



Read more: Silicon Valley Bank’s Downfall: A Warning for Regional Banks