In the last month two US regional banks were taken over by the government agency and another one is trying to raise funds to avoid the same fate. The trigger for all of this was at SVB, as it faced large deposit withdrawals within a short period after they were unable to raise capital even after selling unhedged investments at a loss.
But such an event is not limited to these banks, according to a global brokerage an amount of $1.1 Trillion shifted to money markets and large banks from small and medium-sized last year. The surprising observation made is that half of this amount shifted within two weeks of SVB collapse.
The uncertainty levels remain high even after several assurances from the Treasury Department. And they have every reason to be as the USA has total deposits of $18 trillion and FDIC ( Federal Deposit Insurance Corporation) has total assets amounting to $128 Bn.
The bigger issue is that these banks have seen a large increase in their balance sheet in the last three years because of the stimulus frenzy. This resulted in small and medium-sized banks controlling 60% of residential and 80% of commercial real estate lending, and 45% of consumer loans.
Such a high concentration will result in the difficulty of these loans being refinanced to increase the repayment period as borrowers especially commercial real estate companies go through cash flow problems. This has already started happening as one of the largest REIT Vornado Realty issues resulting in the NAV dropping by 35% since January 2023.