Is Stage Two of the Banking Meltdown Finally Here?

Most of us recall the banking crisis of March – May 2023. It began with the collapse of the little-known Silvergate Bank on March 8. This was followed the next day by the collapse of the much larger Silicon Valley Bank (SVB) on March 9.

SVB had over $120 billion in uninsured deposits. Bank deposits over $250,000 each are not covered by FDIC insurance. Those depositors stood to lose all their money over the insured amount. This would have led to the collapse of hundreds of start-up tech businesses in Silicon Valley that had placed their working capital on deposit at SVB.

There were also much larger businesses such as CISCO and at least one large cryptocurrency exchange that had billions of dollars on deposit there. Those businesses would have taken huge write-downs based on the size of their uninsured deposits.

On March 9, the FDIC said that, indeed the excess deposits were uninsured, and depositors would get “receivership certificates” of uncertain value and zero liquidity instead. By March 11, the FDIC reversed course and said all deposits would be insured. The Federal Reserve intervened and said they would take any U.S. Treasury securities from member banks in exchange for par value in cash, even if the bonds were only worth 80% of par (which most were).

That Sunday night, they also closed Signature Bank, a Boston-based bank with crypto links. The damage wasn’t done. On March 19, the Swiss National Bank forced a merge of UBS and Credit Suisse, one of the largest banks in the world. Credit Suisse was on the edge of insolvency.

Finally, on May 1, First Republic Bank, with over $225 billion in assets, was ordered closed by the government and sold to JPMorgan. After five bank failures in two months and a trillion-dollar bailout by the government, the crisis seemed over. But that was false comfort.

I wrote at the time that the crisis wasn’t over, that it was just halftime. The second stage of the crisis would erupt in an even more dramatic fashion sooner than later. This analysis was based on the “quiet periods” in the middle of the 1997-1998 Asia-Russia financial crisis and the 2007-2009 global financial crisis.

As reported here, it seems that the quiet period is over, and we are entering stage two of the banking meltdown. New York Community Bancorp (NYCB) had taken huge losses of over $2 billion in February 2024 on its commercial real estate (CRE) portfolio. It had been teetering on the brink ever since. On March 6, it was bailed out with $1 billion of new capital raised by former Treasury Secretary Steven Mnuchin and Ken Griffin’s Citadel hedge fund.

NYCB may have been bailed out, but it’s the canary in the coal mine. Its failure means billions more in CRE losses are buried on bank books all over the country. Stage two of the crisis is here, and the effects will be devasting to financial institutions and the stock market as a whole.

Corporate leaders and institutional fiduciaries looking to incorporate state of the art predictive analytics to their risk mitigation and strategic analysis should click the link to learn more about Raven Predictive Analytics®.