Thunderbolt! Supervision of Another Bank Bankruptcy in the United States | Bank | United States

Just as people gradually believe that the turmoil in the banking industry in the United States and Europe has become a thing of the past, on the 28th local time, banks in the heartland of Kansas, USA, were ordered to close by regulatory agencies in their respective states due to insolvency, and were taken over by the Federal Deposit Insurance Corporation. This is the first bank bankruptcy case in the United States since May, and also the fifth bank bankruptcy case in the United States this year.

According to the FDIC's statement on that day, as of March 31, 2023, the total assets of the bank were approximately $139 million, with deposits of approximately $130 million, making it the smallest among the bankrupt banks this year. In contrast, other banks that have gone bankrupt so far this year, excluding voluntarily liquidated Yinmen Bank, have total assets exceeding $100 billion. Among them, the First Republic Bank had total assets of approximately $229 billion when it was taken over, making it the second largest bankrupt bank in US history.

The potential risk points of the European and American banking industry have always been a sensitive nerve in the market. Despite the small size of the bankrupt banks and the large number of regional banks in the United States, bankruptcy due to poor management is not uncommon even in the era of low interest rates. Therefore, should this be seen as an "isolated event"?

Isolated events?

According to the FDIC statement, in order to protect depositors, it has signed a purchase and assumption agreement with the National Association of Dreams First Bank in Syracuse, Kansas, to undertake deposits, loans, and other assets and liabilities of the three state banks in the heartland.

The statement also shows that four branches of the Three State Bank in the heartland will reopen on Monday local time as branches of the National Association's Dream First Bank. Prior to this, depositors of the bank could withdraw funds by writing checks or using ATMs or debit cards. Cheques issued at the bank will continue to be processed, while loan customers should continue to make payments as usual.

The FDIC estimates that the deposit insurance fund will cost $54.2 million. DIF is an insurance fund created by the US Congress in 1933 and managed by the FDIC. In a statement, FDIC stated, "Compared to other options, the acquisition of Dream First Bank by the National Association is the decision with the lowest DIF cost."

Kansas regulatory authorities have stated that the bankruptcy of three state banks in the heartland is an isolated event. This incident has no impact on the banking industry in Kansas, which remains strong.

Will the turbulence in the US banking industry make a comeback?

Analysts say that after the collapse of the First Republic Bank, the challenges faced by the US banking system have increased rather than decreased. On the one hand, the severe inversion of US Treasury long and short-term interest rates, which led to the previous round of liquidity crisis, has persisted to this day, indicating that bank balance sheets continue to be under pressure: on the one hand, the high cost of deposits on the liability side, and on the other hand, the severe impairment of asset net worth on the asset side. Take the interest rate gap between the yields of the two-year and 10-year treasury bond bonds of the United States as an example. The previously narrowed interest rate gap deepened again during this period, and once hit the highest level in decades set in March, and is still near this level.

Although the Federal Reserve quickly launched the bank's term financing plan as an emergency financing tool after the bankruptcy of Silicon Valley banks, it cannot fundamentally solve the problems of floating losses on the asset side and instability on the liability side of small and medium-sized banks, and it is difficult to completely eliminate the concerns of depositors about small and medium-sized banks. Once the Federal Reserve's borrowing limit is exhausted and the withdrawal needs cannot be met, the bank will eventually go bankrupt.

According to the latest data from the Federal Reserve, as of the week ending July 26th, BTFP's financing loans increased from $102.9 billion a week ago to $105.1 billion, setting a new high since the launch of the financing plan. To make matters worse, after stabilizing and rebounding for a period of time, deposits in the US banking industry have once again shown a downward trend in recent times. According to seasonally adjusted data released by the Federal Reserve, commercial bank deposits plummeted by $78.7 billion in the week ending July 22, marking the largest deposit outflow since the collapse of a Silicon Valley bank.

On the other hand, the cash reserves of the US Treasury in May were nearing depletion due to the extreme tug of war between the two parties over the debt ceiling issue. As the US government reconstructs its general account, treasury bond bonds may be issued in large quantities, which will absorb market funds and tighten the liquidity of the banking system.

Market insiders say that money market mutual funds are considered the most ideal recipients of newly issued bonds. However, as money market funds have already received substantial risk-free returns from the Federal Reserve's overnight reverse repurchase agreement tool, the attractiveness of short-term Treasury bills to such funds may be limited.

JPMorgan Chase strategist Nikolai Paniglio previously told First Financial reporters, "We still believe that the majority of TGA reconstruction will come at the cost of sacrificing reserves rather than RRP, which means that TGA reconstruction will increase liquidity loss naturally occurring through QT... Even in extreme cases where TGA reconstruction comes entirely from RRP rather than reserves, the broad liquidity in the United States will still shrink by more than 4%."

On the day before the collapse of three state banks in the heartland, the US banking regulatory authorities released a draft of the so-called "final" rules of Basel III, including tightening capital requirements for banks with assets of over $100 billion. If the new regulations are finally finalized, these banks will meet the capital adequacy requirements of the agreement during the transition period, which may subject regional banks that were not originally classified as strictly regulated to stricter supervision.

"The proposal to increase regulatory capital requirements for banks with assets exceeding $100 billion is beneficial for credit in the long run," said Alsoff, Managing Director of Financial Institutions at Moody's Investor Services. "However, these banks may face higher short-term costs to meet these requirements and require time to transition to higher capital levels. Considering unfavorable factors such as rising financing costs for banks, inverted bond yield curves, and potential deterioration in asset quality in the coming quarters, raising funds in an 'organic' manner may be more challenging."