The US Banking System has been traipsing in precocious times with the digressions of the SVB Collapse and failure of Signature Bank, inducing the indignation of the financial sector. 

The inflation instigated the Federal Reserve to hike interest rates which pushed the US Regional Banks into a corner – beginning the year with decreased cash reserves similar to the 2008 financial crisis, which caught them off guard with an unanticipated surge in deposit outflows. This attributed immensely to the vulnerability of the Silicon Valley Bank leading to its instability. Collectively, most of the regional banks cut back on cash holding by half. 

The Inadequacy Of Regional Banks Led To Their Downfall 

According to the Federal Deposit Insurance Corporation (FDIC), nearly 30 banks with assets valuing between $50 billion – $250 billion had retrenched their proportion of cash-in-hand to 7 percent of the total assets at the dawn of 2023, decreasing from 13 percent of the previous year and less than half of the nation’s largest and regulated lenders like Citigroup and JPMorgan Chase, which on an average held 15 percent of the assets in cash.

This pittance exploited the vulnerability of regional banks like Signature Bank and SVB, which had not contemplated the possibility of massive cash withdrawals, destabilizing their foot on losses, leading to banks unwillingly selling securities to give account holders their finances. 

The managing director of Graham Fisher & Co, Josh Rosner analyzed the augmentation of fear and sheer panic in bank stocks when investors took a look under the hood of the available cash on hand.. 

“The low levels of cash were a nosedive from the first year of the pandemic when the US government was able to reduce consumer spending, spurring a nationwide influx in cash deposits.”

Banks Jostled The Federal Reserve, Which Was Fighting Inflation

In the latter half of 2022, regional banks began to draw down their cash reserves to start the ball rolling on beefing up other securities such as loans and bonds. 

To cite an instance, SVB’s cash holdings dropped from 14 percent ($22 billion) of their total assets in mid-2021, to 6 percent ($12 billion) in early 2023. But a parallel segment of SVB’s bond portfolio surging from $83 billion to $117 billion and loan hikes from $50 billion to $72 billion, painted a quite vivid picture. 

“As the Fed Reserve set to fight inflation, smaller banks were finding it more challenging to seek profits.”

Smaller banks or regional banks cash up on the difference between short-term and long-term interest rates because of the notions of lesser fee revenues than the bigger banks (from asset management, investment banking or credit cards). The banking failures across the nation are owed to a number of reasons, particularly the Fed. The Fed Reserve’s move to increase interest rates strangled the previous year’s income, pushing regional banks to pump more cash to achieve the same profitability levels. 

Banks had to either change their direction by moving assets blocked in cash to bonds that earned a modest interest or earn nothing. These risks never materialized until suddenly more and more SVB depositors were demanding to withdraw funds that the bank was short on. And when Silicon Valley Bank found itself mired in the cash shortage, it sold bonds at a loss of $1.8 billion, triggering backlash and SVB’s collapse.

Are US Regional Banks Safe?

Amongst the reasons for the banking crisis, industry analysts believe a significant role could be attested to regulation or the lack of it. After the infamous financial crisis of 2008, liquidity rules entailed banks with more than $50 billion in assets to hold more than 10 percent of their assets in cash. In 2018, lawmakers loosened the regulations for banks with assets less than $250 billion, foreshadowing the fall of SVB and Signature Bank at breakneck speed. 

First Republic Bank stepped into 2023 with the minutest 2 percent of its assets in cash, leading to the drastic plunge of its shares by 90 percent. To stabilize the California-based bank’s shares, 11 of the nation’s largest banks deposited $30 billion.

The share price of KeyCorp was down 30 percent in March end, which started the year with $3 billion – 2 percent of its assets in cash. On the other side, Citigroup entered 2023 with an incredible 25 percent of its deposits in cash, and its stock has fallen just by 10 percent in March.

None of the banks wants to be the one that investors are worried about and they’re fighting tooth and nail to ensure the positioning of their cash reserves remains sufficient when financials reflect at the end of the quarter.

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