By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
I remember it like it was just yesterday.
My former employer, Bear Stearns, collapsed in March 2008. So Wall Street powerhouse JPMorgan Chase stepped in to take over.
But Bear was just the first of 25 banks to fall as the financial crisis unfolded.
Now, history is repeating itself. The failed banks are piling up.
Late last month, First Republic Bank (FRB) became the second-largest bank failure in U.S. history. It folded on the back of a 1930s-style run on its deposits.
After being seized by federal regulators, most of its business was sold to JPMorgan Chase… just like Bear Stearns was 15 years ago.
Now, California-based Pacific Western looks like it could be the next bank to bite the dust.
I’ll get to how this impacts you and your money in a moment. But first, let’s recap the 2023 banking crisis so far…
The Recent U.S. Bank Failures Are a Problem of the Fed’s Making
As we’ve written, in March, Silicon Valley Bank (SVB) and Signature Bank collapsed in just a matter of days. Global banking giant Credit Suisse in Europe followed shortly afterward.
Bank analysts and the financial media’s talking heads thought these events wouldn’t cause a banking meltdown.
Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell even called the banking systems “sound and resilient.”
But I argued otherwise. I predicted more contagion across the sector. And that’s exactly what’s happening now.
I also don’t expect this trend to stop anytime soon. Here’s why…
Even though the Fed won’t admit it, its actions caused problems in the banking sector.
When the Fed raised rates quickly, it hurt the value of the Treasurys banks held for liquidity purposes. That created massive paper losses.
Now, normally, even if banks face paper losses, they can navigate some liquidity problems. But when a large number of depositors take their money out at the same time, then these paper losses turn into real ones.
That’s the problem we’re seeing today.
The banking system – just like the economy – is built on trust. So when integrity in the banking system is tested, trust begins to crumble at its foundation.
That’s why this systemic problem has not gone away.
In fact, U.S. banks as a group are currently sitting on $620 billion in unrealized paper losses on government securities. That’s what the chart below shows…
It’s a time bomb waiting to go off.
Worse, the banks also expect to earn less from their loan businesses this year as customers put their money in Treasurys instead of bank deposits.
That means banks have less capital to lend. This, in turn, could cause a credit crunch in the banking system.
Now, the banks are getting squeezed on all sides. This is especially the case with mid-tier banks on the West Coast.
And that brings us back to PacWest…
Pacific Western Is on the Verge of Collapse
Pacific Western, a California bank with $44 billion in assets, is the latest bank showing classic symptoms of a bank failure.
The warning signs have been flashing for a month now.
In the first part of this year alone, its deposits dropped a stunning $6.94 billion, or 24.54% of its accounts.
The main reason? PacWest was paying an exceptionally low interest rate on its deposit base over the last several years.
All the banks that collapsed this year have this in common. Silvergate Bank, Silicon Valley Bank, and First Republic Bank offered lower deposit rates than their peers and competition.
So depositors had no real incentive to keep their money. It was a game of chicken and the regional banks blinked. As rates were rising, depositors turned elsewhere to get better interest returns on their deposits.
Now, not all banks are created equal.
Larger, publicly traded banks receive favorable treatment from the Fed. They get bailed out in times of emergency. For nearly two decades, the Fed has stepped in to save these big banks – by reversing its interest rate policy to print more money.
And the big four commercial banks – JPMorgan, Bank of America, Wells Fargo, and Citigroup – leverage this relationship to pay little-to-no interest on deposit accounts.
Meanwhile, the next tier of banks remains vulnerable to failure and takeovers by big banks. It’s a system of hierarchy, built to elevate “Too-Big-to-Fail” banks above all else.
You see, the massive monetary and fiscal stimulus deployed two years ago led to today’s issues with many banks.
At the time, people stomached getting no interest on their deposits when rates were near zero. That’s because they didn’t have what they thought to be a more secure alternative, like higher interest-paying Treasury bonds.
But the Fed’s rapid interest rate hikes changed that. Suddenly, customers demanded their deposits keep up with the rate hikes. When that didn’t happen, they moved their money from banks that either refused or were too slow to adjust.
After First Republic Bank was taken over, PacWest saw another rush of deposit withdrawals. Fear was in the air, and trust was running low.
Last Thursday, shares of PacWest Bancorp took a dive. This happened after the bank reported that customers withdrew about 9.5% of total deposits. As a result, its stock fell 30% before being halted for volatility. When shares resumed trading, they finished down by 23%.
And they still haven’t recovered. As of yesterday’s close, PacWest’s stock is down 61%. So we wouldn’t be surprised if we see a big story about its collapse sometime soon.
Here’s what this means for your money, though…
How to Stay Ahead of Bank Failures
As we keep warning you, we expect more mid-tier, regional bank failures.
Many of you have asked if your bank is safe during this period of turmoil… or if you should move your money.
While I am not able to give you specific financial advice, I can tell you this. The banking system is only secure as long as people believe in it.
That said, the Fed will step in and print money to save failing banks. Or bigger banks will buy them up. Big banks are happy to buy the deposits and assets of regional banks in trouble.
So, as long as your money is FDIC-insured, it should be safe. But not all banks are FDIC-insured. You can find out which ones are through this directory.
There are also three other things you can do to sleep better at night. Here’s a checklist to go through if your money is in a regional bank:
Is your bank publicly traded? Market forces and short-sellers (those who speculate against stocks) can batter these more quickly as sentiment and confidence head south.
Did your bank pay higher interest on deposits as the Fed raised rates? If not, it may lose deposits to other banks. And this can cause a bank run.
Did your bank borrow large sums to make ends meet? This is hard to know without access to regulatory data, so read our rule of thumb below.
If the answer to those three questions is yes, consider diversifying your deposits.
As a rule of thumb, it is best to avoid investing in mid-tier banks that meet these criteria.
These include Zions Bank, Western Alliance, First Horizon Bank, and others in their peer group that paid little on deposits as the Fed was raising rates.
Also, consider putting your deposits in banks that pay you a higher deposit rate. Make sure they have FDIC deposit protection.
These include more solid mid-size banks, such as Citizens and PNC, which only require a $1 minimum deposit and pay more than 4.5% on deposits.
Editor, Inside Wall Street with Nomi Prins
P.S. As more banks fail, the Federal Reserve, the White House, and the financial elite are set to enact the biggest change to our money since 1971…
I’ve found evidence that a small group of powerful people are colluding to virtually “ban” cash – leading to the end of the dollar as we know it. Pulling your cash out of the bank won’t be possible. But I found one asset that will help you become your own banker and escape the clutches of this power grab.
I put the details in this new video presentation I just released. I’ll also show you my No. 1 gold pick for 2023 and beyond… and three “unprintable” plays to take advantage of the Fed’s next major distortion of the financial system. Watch it here.