After the recent bank failures in the U.S., many experts are sounding alarms that the country may be facing a banking crisis. Charles Gasparino, an American journalist, believes that the banking industry is facing major problems that many are ignoring, and Danielle DiMartino Booth, the CEO of Quill Intelligence, sees more bank failures on the horizon. Gasparino argues that the “low-rate” junkies on Wall Street are ignoring the rot inside the banking system, and many of these commercial bankers took wild gambles, leading to the recent failures of Silicon Valley Bank and Signature Bank. Gasparino warns that as many as two dozen other banks may be facing similar problems and could fail if things continue to go south. Meanwhile, Booth criticizes the government for bailing out certain banks, creating a precedent that cannot be unset and potentially leading to future crises.
According to a paper published on March 13 by researchers at New York University, U.S. banks had unrealized losses of $1.7 trillion in Dec. 2022. These losses, combined with lower interest rates and higher inflation, are creating a perfect storm for the banking industry. Gasparino compares the current stock market rally to the “stupefied giddiness of a junkie who just got his fix whenever he hears lower rates are in the offing.” The problem, he argues, is that traders may be wishing for lower rates, but Fed chair Jerome Powell recently stressed that “rate cuts are not in our base case,” and he insisted that “inflation remains too high.”
Booth believes that more bank failures are likely to occur, as “we have not seen the biggest banks step up,” and many of these troubled banks are in no man’s land. She claims that the government is in a corner because it has backed uninsured deposits of certain banks, making it difficult for regulators to pick winners and losers. Booth warns that the U.S. is in the middle of a banking crisis that nobody wants to call a banking crisis.
To prevent further banking crises in the U.S., certain measures need to be taken. First, banks need to be held accountable for their actions, particularly those that took wild gambles leading to their eventual failures. Further, regulators must be proactive in addressing issues before they escalate into full-blown crises. These actions can include stress tests and increased oversight to detect potential problems. Additionally, the government must avoid backing uninsured deposits of failing banks to prevent a precedent that will lead to further crises.
In conclusion, the U.S. banking industry is facing major problems that many are ignoring. With unrealized losses of $1.7 trillion, lower interest rates, and higher inflation, the industry is facing a perfect storm that could lead to more bank failures. The government must take proactive measures to hold banks accountable, detect potential problems early, and avoid backing uninsured deposits of failing banks. Failure to take these actions could lead to a full-blown banking crisis that nobody wants to call a banking crisis.
