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The above section contains excerpts from a lengthy article in The New York Times, which was heavily edited for brevity.Banks are teetering as customers yank their deposits. Markets are seesawing as investors scurry toward safety. Regulators are scrambling after years of complacency.
The sudden collapses of Silicon Valley Bank and Signature Bank — the biggest bank failures since the Great Recession — have put the precariousness of lenders in stark relief. The problem for SVB was that it held many bonds that were bought back when interest rates were low. Over the past year, the Federal Reserve has raised interest rates eight times. As rates went up, newer versions of bonds became more valuable to investors than those SVB was holding.
The bank racked up nearly $2 billion in losses. Those losses set off alarms with investors and some of the bank’s customers, who began withdrawing their money — a classic bank run was underway.
Even before SVB capsized, investors were racing to figure out which other banks might be susceptible to similar spirals. One bright red flag: large losses in a bank’s bond portfolios. These are known as unrealized losses — they turn into real losses only if the banks have to sell the assets. These unrealized losses are especially notable as a percentage of a bank’s deposits — a crucial metric, since more losses mean a greater chance of a bank struggling to repay its customers.
At the end of last year U.S. banks were facing more than $600 billion of unrealized losses because of rising rates, federal regulators estimated. Those losses had the potential to chew through more than one-third of banks’ so-called capital buffers, which are meant to protect depositors from losses. The thinner a bank’s capital buffers, the greater its customers’ risk of losing money and the more likely investors and customers are to flee.
But the $600 billion figure, which accounted for a limited set of a bank’s assets, might understate the severity of the industry’s potential losses. This week alone, two separate groups of academics released papers estimating that banks were facing at least $1.7 trillion in potential losses.
Midsize banks like SVB do not have the same regulatory oversight as the nation’s biggest banks, who, among other provisions, are subject to tougher requirements to have a certain amount of reserves in moments of crisis. But no bank is completely immune to a run.
First Republic Bank was forced to seek a lifeline this week, receiving tens of billions of dollars from other banks. On Thursday, the U.S. authorities helped organize an industry bailout of First Republic — one of the large banks that had attracted particular attention from nervous investors.
The troubles lurking in the balance sheets of small banks could have a large effect on the economy. The banks could change their lending standards in order to shore up their finances, making it harder for a person to take out a mortgage or a business to get a loan to expand.
Analysts at Goldman believe that this will have the same impact as a Fed interest rate increase of up to half a point. Economists have been debating whether the Fed should stop raising rates because of the financial turmoil, and futures markets suggest that many traders believe it could begin cutting rates before the end of the year.
On Friday, investors continued to pummel the shares of regional bank stocks. First Republic’s stock is down more than 80 percent for the year, and other regional banks like Pacific Western and Western Alliance have lost more than half their values.
Investors, in other words, are far from convinced that the crisis is over.
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