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by John Rapley
Monday, 8
May 2023

The regional banking crisis was always going to happen

The regulators have been asleep on the job
by John Rapley
Get your act together, boys. Credit: Getty

Historians may one day look back on today’s American bank runs and wonder what all the fuss was about. What’s happening was always bound to happen. The mystery is only why so few of those responsible saw it coming, then did such a bad job of dealing with it. No less a figure than Warren Buffett has said in recent days that the directors of such banks should face “punishment” for their failures.

Writing the narrative of the messy hangovers that were bound to follow the decade-long cheap-money party, those future historians would start with asset values that soared beyond reasonable levels. To that, they’d then add regional banks keen to ride the boom by loading up on commercial real estate, one of the mainstays of their business model. They’d stir in a bit of Trump-era deregulation that loosened controls on these same banks so that they could engage in riskier, higher-return activities — great for their profit margins and share values, but predicated on the misguided assumption that all-but-free money would last forever.  

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To that already volatile brew they’d then add global changes to labour markets that enabled workers, for the first time in decades, to begin clawing back just some of the rising asset inflation they’d had to absorb (especially in housing costs). Finally, as if all that were not cause enough for concern, they’d sprinkle in the profound and permanent changes to the way we work, shop and play that happened during the pandemic, all of which reduced corporate demand for commercial space, with falling commercial real estate values following.

Anyone with an ounce of foresight could have seen where this would go next. Once rising wages pulled the floor out from disinflation, prices began rising across the board, and central banks were forced to backtrack rapidly and jack up borrowing costs. That further cut demand for property, locking in the pandemic-induced losses on commercial real estate. This all happened as the clients of regional banks, themselves needing more cash to cover their own higher debt charges, began withdrawing money. When the first banks began falling, the disco was obviously over.

Unfortunately, there has been no clean-up. With the politicians in Washington, D.C. engaged in some dangerous brinkmanship over the debt ceiling, the Biden administration has been constrained in what it could do. Meanwhile, the Federal Reserve is led by a chairman who flip-flopped in his communications about the direction of monetary policy, leaving depositors and investors alike unsure as to what might happen should things actually turn nasty. So it won’t surprise them that into this vacuum stepped some opportunistic short sellers, who spied an opportunity to drive down the share values of smaller banks, sowing panic among their depositors and creating a self-fulfilling policy that left them laughing all the way to their (large and secure) banks.

That’s how the future narrative will be written. How it ends, and in particular whether the rolling panic turns into a full-blown crisis, will be determined by those around today. Perhaps the key actors in this drama, like the central bankers who pushed easy money, the deregulating politicians, and the economists whose models predicted that asset prices would continue rising endlessly without any deleterious effects on the economy, will one day tell us what they were thinking. Because from today’s vantage-point, the primary temptation is to conclude that they weren’t.

For Americans living through this anxious time, they’d do everyone a favour if they got their act together, took the necessary steps to stem the contagion, and then finally cleaned up some of the mess still left over from the 2008 crash. This includes, most likely, taking a far greater regulatory interest in the banks they’re constantly having to rescue.

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Malcolm Webb
Malcolm Webb
4 months ago

Correct analysis – but the big question is can we rely on this crop of uninspiring Central Bankers to take the right actions? I fear not and I also fear that, if they tried, our woeful current crop of politicians would somehow stop them.

UnHerd Reader
UnHerd Reader
4 months ago
Reply to  Malcolm Webb

The central bankers are harvesting the small banks. They are a great white shark in a shoal of mackerel. Money is being consolidated, CBDCs are coming.

The Global Elites have had enough with all this Middle Class and Working class free thinking and democracy and are harvesting the global wealth so all must become poor and become clients of the State. Neo-Feudalism. Bend the knee you proles….


Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

UnHerd Reader
UnHerd Reader
4 months ago

What a mad, Rube Goldberg machine, of conditions this guy invents and catalogues, and then says how obvious it all is….

I do not think he knows what he it talking about.

It is simple. The banks collateralized with long term bonds and mortgage backed securities at almost no interest. These dropped in value 20 – 40 % if ‘Marked to Market’ so were now just worth 60 – 80% of the value they collateralizing. (when interest rates rise bonds with lower interest plummet down in price in the re-sale market because they locked in a loss compared to the higher interest bonds)

All fine though if the bonds could be left till maturity – but that was not going to happen. Once people withdrew their deposits, being rightfully worried that a run will break the bank, then the bank would have to sell those bonds now worth 60 – 80 cents on the dollar to cover it. Thais is impossible, so the bank is broken as it cannot cover the withdrawals.

If everyone just left their money in the bank so the bonds could mature over the next 2 – 20 – 30 years all would be fine. But who would? Once they know the bank will collapse if people withdraw their deposits all know they better withdraw first to be safe – so a run, so a crash.

No need for the TDS .” They’d stir in a bit of Trump-era deregulation”

It is just keeping interest rates at zero with QE for 13 years, and allowing these long term no interest bonds to be collateral.

Everything else is Insane too – but the simple fact is QE cannot work – the wall will finally be hit…. and there is a many headed hydra loosed from this Debt Economy.

UnHerd Reader
UnHerd Reader
4 months ago
Reply to  UnHerd Reader

(see the Liz Truss mini budget – just think what pensions and Insurance companies are going through – same as banks.)

4 months ago

I’m unclear on what the banks, in a near-zero-return environment, were supposed to do. The regulators’ gamed-up stress tests didn’t take rising rates, let alone rapidly rising rates, into account. What were they supposed to do to make money? They were holding deposits, and nobody wanted to pay to rent them.
The inaction by the Feds is unforgivable. They could have stopped all of this, and bought time to craft solutions. Instead, they played right into the shorts’ hands, and soon, we’re going to have a too-big-to-fail fail, while we get lectured about how centralization of money, like power, is a good thing.