The New Banking Crisis Is Not Over. It’s Just Getting Started.

This article is a timely reminder that the new banking crisis is not over – it’s just on pause for the time being. We had a few weeks of borderline crisis from March 9 through March 20 with the sequential failures of Silvergate Bank (March 9), Silicon Valley Bank (March 10), Signature Bank (March 12), and the shotgun wedding of UBS and Credit Suisse (March 19).

Even after March 20, the prominent First Republic Bank was hanging by a thread and only alive because of a $30 billion cash infusion from JPMorgan, Citi, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley – the usual suspects. That cash kept First Republic on life support but it was not a recapitalization and did not solve First Republic’s problems. That’s another shoe waiting to drop.

Still, things have been relatively quiet since then. No additional banks have failed, and the various runs on the bank seem to have quieted down. Yet, this article is a reminder that deposits are still fleeing small and mid-sized regional banks.

The deposits are going to buy money market funds (which put much of their money with the Fed where it does nothing for the economy) or to buy Treasury bills from dealers (who also put their money with the Fed in the form of excess reserves).

In short, bank money is still disappearing and the economy suffers as a result. Even when depositors take money out of one bank and deposit it in another, the flow is in the direction of the too-big-to-fail banks to the detriment of smaller banks more willing to make loans to local businesses.

Behind the scenes of the international monetary system, the dysfunctions such as collateral shortages, dollar shortages, inverted yield curves, and negative swap spreads continue.

Financial crises never move in a straight line. They have explosions followed by quiet periods until the final blow-up. The crisis that started in June 1997 had a quiet period around January 1998 before the final blow-up in September 1998.

The crisis that started in July 2007 had a quiet period around January 2008 before the final blow-up in September 2008. We’re in one of those quiet periods right now. It’s not over. Get ready for the final blow-up.

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