Read this article to understand:
- Why we need to look past the number of bank failures to understand the magnitude of the problem
- The market impact of Silicon Valley Bank’s fall
- Why investors should keep an eye on the US commercial real estate sector
Are we heading for another US banking crisis?
In 1873, one of the biggest banks in New York City, Jay Cooke & Company, went bankrupt. When people saw such a large institution fall, they ran to their own banks to demand their money back. The panic spread and at least 100 banks failed.1
Anxious customers can simply press a button on their banking app to withdraw cash
Fast-forward to 2023, and anxious customers no longer need to queue at a branch to get their cash back – they can simply press a button on their banking app. This year, the quick withdrawal of deposits enabled by technology hastened the demise of US lenders Silicon Valley Bank (SVB) and Signature Bank. Amid the global fallout, Swiss banking giant Credit Suisse also faltered and was eventually acquired by domestic rival UBS.
According to the Federal Deposit Insurance Corporation (FDIC), there have been 563 US bank failures between 2001 and 2023. Unsurprisingly, most happened during and just after the Global Financial Crisis (GFC), with the highest number in 2009 and 2010 – 140 and 157 respectively.
Figure 1: Number of US bank failures per year (2001–2023)
Source: Aviva Investors, FDIC, March 20232
While 2023 has seen only a handful of US bank failures, total assets of the failed banks was not far off the total for 2008. This is because SVB was the 16th largest bank in the US; its failure was the second-largest bank failure in US history. The largest happened in 2008, when Washington Mutual Bank collapsed (see Figure 2).
Figure 2: Approximate total assets of failed US banks (million dollars)
Source: Aviva Investors, FDIC, March 20233
This begs some key questions: Will there be a lasting impact on markets? Will lending standards tighten in the US (and elsewhere)? And if lending does tighten, how will this affect the wider economy?
What’s the effect on the market?
Since the GFC, the banking sector has lagged the broader US equity market by a staggering 147 per cent (Figure 3).
Zooming in on performance over the last year, while banks initially tracked the overall market quite closely, things changed sharply in March after SVB's failure.
Figure 3: US financials versus US market (per cent)
Source: Aviva Investors, Eikon. Data as of March 31, 2023
Small banks, big problems
Small banks pay a big role in the US economy, with Figure 4 highlighting the enormous gap between smaller banks’ lending and that of their larger counterparts.
Figure 4: Large versus small US banks’ lending amounts (US$ trillion)
Source: Macrobond, March 2023
Now, after the collapse of SVB and Signature Bank, a pullback in lending among small banks is underway. Will stricter lending standards slow economic growth?
Currently, attention is largely focused on banks' exposure to the US commercial real estate sector, which has been hit by raising interest rates (Figure 5).
Figure 5: Share of loans held by small domestic banks, by sector (per cent)
Source: Aviva Investors, Federal Reserve. Data as of March 8, 2023