[Economics] Why are medium-sized banks at the center of the financial crisis (and what does it have to do with the nervousness of the markets

[HeWhoRemains™]

A wave of insolvencies among midsize banks has markets on edge, wondering who will be next.

Under observation is the First Republic Bank of the United States, saved in extremis by a capital injection of US$30,000 million made by 11 Wall Street banks.

Many see it as a weak link since it has also been a victim of the same customer flight that sank Silicon Valley Bank, Signature Bank and Silvergate Capital Corp. in the United States and Credit Suisse in Europe within 48 hours of each other. .

Its shares have plummeted from $133.87 to $15 in just 15 days, that is, they are worth approximately 87% less.

And it is precisely the withdrawal of funds and mistrust that is at the base of the rapid collapse of the regional banks in the United States and the panic attack suffered by the stock markets these days.

Today "people can withdraw deposits from the banking system with the speed and fervor of those trying to buy Taylor Swift concert tickets," said Paul Donovan, chief economist at UBS Global Wealth Management.

"The economic environment makes people lose confidence in banks and choose to withdraw their money, as is happening now. And that is not good. Bank deposits are the gasoline they need to function," he told BBC Mundo Víctor Alvargonzález, director of strategy and founding partner of the independent advisory firm, Nextep Finance.

If there is a mass exit, the bank is seriously exposed and very quickly.

The origin: the wild rise in rates
On the other hand, "you have to keep in mind that if your clients have problems, as an entity, you have problems," adds Alvargonzález while acknowledging that the psychology of the market and depositors has played a role in what happened.

This is clear, for example, in the case of Silvergate Capital Corp., highly exposed to the cryptocurrency industry, or SVB whose main clients belong to the technology sector, another of those most affected by the current crisis.

But while analysts agree that each bank suffered from its own specific problems, these incidents can also be seen as the consequences of the fastest and biggest interest rate hike in more than 40 years.

The experts agree: the origin of this crisis lies in the rate hikes and what we are seeing in the banking sector is only a side effect -unwanted- of the "medicine that cures inflation".

Escape from the small to the great
"The extremely rapid normalization of monetary policy translated into a loss of client confidence that led them to quickly withdraw their funds from banks perceived as weak," Elisa Belgacem, senior credit strategist at Generali Investments.

"Although banks are better capitalized than in 2008, especially in Europe, the flight of deposits from smaller banks to larger and safer ones is likely to continue," says the expert.

The figures show that small banks are clearly under pressure.

"There is a flight of deposits to the largest and best-regulated US banks," says Axel Botte, global market strategist at Ostrum AM.

Rising rates can trigger a recession, and that fear leads customers to choose very carefully where to put their money. Hence the preference for solid and reliable banks.

recession and credits
Most striking of all, economic theory says that when interest rates are high (as they are now) banks make more money.

In a high rate environment, the sector earns more profit.

"It is very good for the banks - for all of them - that interest rates rise because they earn much more on loans. Those who have variable credit pay more interest, so the bank without doing anything earns much more money," says Alvargonzález .

And this happens not only in the existing loan portfolio but in all the new loans that are granted.

"Now, if the economy goes into recession, the banks are going to give less loans and people are going to ask for fewer loans, with which this already spoils the good news of the rise in interest rates and this is the spark that ignites this crisis of confidence," he explains.

Ben Laidler, global markets strategist at the investment platform eToro, explains why it is the mid-market banks that are suffering the most.

"Small and midsize US banks, with assets below $250bn, will bear the brunt of the current liquidity grab and regulatory measures."

Its importance in some areas is disproportionate.

For example, they account for 60% of mortgage loans and more than 70% of commercial real estate loans in the United States.

Economic growth indicator
"Lending standards on both sides of the Atlantic have become much tougher. Institutions have increased the requirements for granting loans," he says.

For Laidler, the difficulty in accessing credit is a clear early indicator of a slowdown in economic growth.

What happened at Credit Suisse also demonstrates the extent to which the banking sector remains sensitive to confidence.

Investors doubt the health of other banks and wonder whether or not bank problems are systemic.

That is, if they affect the entire sector or just a few.

For this reason, few analysts dare to venture that everything is going to stay here and that we are not facing a crisis like that of 2008.

"It would be presumptuous to guarantee the contrary, since the only certainty that exists in finance is that everything is unpredictable, especially after such brutal rises in interest rates as the ones we have just experienced," says Alexis Bienvenu, manager of funds of the French manager La Financière de l'Echiquier

The analyst warns that "the current tensions, despite being localized, will have consequences for the rest of the economy."

Also for Latin America, given that the probability that growth will slow down will lead banks to be more cautious in granting loans.

The world currently has many political and economic changes to digest and although this is a crisis of confidence and not of solvency, the markets do not forget what happened in 2008 and that is why the nervousness may continue for a few more months.

https://www.bbc.com/mundo/noticias-65032021