The US Banking Situation, 2023



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And now let’s talk about the U.S banking crisis; it’s not over. On Monday we told you about First Republic Bank — it’s been sold to JP Morgan.

And this has triggered new fears banking stocks in the U.S are down. Investors are worried they fear that more banks are on the brink, that more banks could fail.

But what’s the basis of this? What is driving these concerns? That’s what we’ll discuss tonight, starting with the latest.

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Bank stocks took a beating on Tuesday; these are mostly mid-sized banks. What are mid-sized banks? Those with assets of 15 to 115 billion dollars. It’s a big range.

These are typically banks that start as hometown banks catering to a specific town or community. As they grow, they expand to nearby regions, usually by delivering highly personalized services.

These are mid-sized banks, and they took a beating yesterday. Topping the list is a Los Angeles-based bank called Pac West. Stocks fell by more than twenty-seven percent (27%).

Then we have a bank called Western Alliance; it lost fifteen percent of its stock value. Third on the list is Keycorp down by nine percent. A bank called Comerica shed twelve percent. Synovus Financial Corps lost seven percent.

These numbers translate into billions of dollars — and this trend is concerning.

The question is, what is driving it?

On first impressions this seems to be a reaction to First Republic’s takeover (We talked about this on Monday): First Republic has been sold to JP Morgan. It’s the Third Bank to fail in this crisis, also the second largest bank failure in U.S history.

Earlier eleven banks tried to rescue First Republic — they injected 30 billion dollars to avoid the collapse, but they couldn’t save the bank. So the regulator stepped in and the bank had to be sold.

First Republic too was a mid-sized lender, the kind of banks we talked about earlier. And its collapse has left investors worried: they fear other banks will meet the same fate.

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The question is, is this an overreaction or a legitimate concern?

Now if you follow stocks you’d know that they mostly react to sentiment so it could just be that a sharp reaction to a bank collapsing.

But here’s something that we cannot ignore the vulnerabilities in the U.S economy the collapsing banks have exposed them. And they could put pressure on other banks.

Now what are these vulnerabilities?

First is commercial real estate valuation of commercial property has fallen drastically in the U.S: prices are down by 20 to 25 percent. For office spaces the decline is steeper: it’s a fall of 30 percent.

Now how does this impact banks?

Well they fund the acquisition of such properties; a large part of their lending is for commercial real estate. The buyers take out loans they buy property on mortgage, and they owe money to banks.

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Now there are signs of stress buyers are not being able to keep up with mortgages — in February a leading property trust defaulted.

Do you know what was the value of their debt?

More than 1.7 billion dollars!

Last month there was another high profile default. It was a 161 million US dollar.

So clearly commercial loans are under pressure.

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And that’s one problem. Here’s another: banks are sitting on a pile of unrealized losses. What are unrealized losses? And how did banks end up with such losses?

This is basically about a bank’s book of assets. So you buy something for one hundred dollars then the price of that asset falls to $80. You haven’t sold it yet . . . but if you sell it you’ll incur a loss of twenty dollars.

That’s your unrealized loss — it’s a potential loss. It means you’re holding a loss making asset: whenever you sell it you’ll make a loss, hence the term “unrealized loss”.

American banks have a lot of these losses; going by one estimate 620 billion dollars, meaning U.S banks are sitting on a 620 billion dollar pile of unrealized losses.

Sounds like a huge sum, but it could be worse because some experts say this is a conservative estimate, and the actual number could be much higher.

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And these are the vulnerabilities that worry investors the fear of more bad debts and the unrealized losses.

You see banking works like a pack of dominoes if one piece falls the others will most certainly follow; that’s what we call a “domino effect”.

And the U.S banking sector is staring at this possibility.

Let me show you more numbers over 2,000 American banks are looking at losses their liabilities are bigger than their assets the value of their loan portfolios has fallen dramatically — and when I say dramatically I mean something to the tune of two trillion dollars.

These are the blind spots of the U.S banking system.

Unless The Regulators move fast they will end up with a train crash . . . And it’s not something that the world can afford.

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Bank. Only one US bank, Silicon Valley Bank has financial problems. True or false?

Financial Institution. At the moment, are more people interested in buying stocks in American banks?

Wall Street. It’s mostly small banks and credit unions that are under duress. Is this right or wrong? Does it involved several hundred million dollars?

Stock Market, Stocks, Shares. Has First Republic Bank completely collapsed, gone bankrupt and cease to exist?

Investment. Stock and share prices are a precise, scientific calculation as to the health of an enterprise. Is this right or wrong?

Deposit, Withdrawal. Is there a connection, correlation or relationship between the banking industry and the economy as a whole?

Loan, Borrow. In the report, the underlying cause of financial distress is family home mortgages. Is this correct or incorrect?
Credit, Debt. What is an “unrealized loss” and the “domino effect”? What example does the presenter give?

Interest Rate. Have there been banking crises or scandals in your town, city or country?

Treasury Bonds. Why were there banking crises? What caused the banking crisis?

Mortgage. What have you been told or taught about money and banks by your parents, teachers, the media, self-help, motivational and success coaches and gurus?

Default, Foreclosure. What might happen in the future?

Bankruptcy. What could or should people, the governments, teacher, the media, society do?

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