The U.S. Banking Crisis triggered worries about the global banking system earlier in the year. Three mid-sized U.S. banks, Silicon Valley Bank, Silvergate and Signature, fell in quick succession, driving down bank share prices across the world.

The 2023 banks failure made America’s central bank, the Federal Reserve, give significant amounts of cash available to the failed banks and created a lending facility for other struggling institutions. This calmed investors and prevented immediate contagion, with only one more U.S. regional bank, First Republic, adding to U.S. banking crisis and collapsing a few weeks later. Yet it’s far from clear whether the U.S. banking crisis is really over.

U.S. banking crisis, 2023

U.S. lenders are holding onto large piles of cash as insurance against a slowing economy, continuing deposit outflows and looming tougher liquidity rules that could particularly impact mid-sized banks.

The buildup is another example of a risk-averse approach from a sector still trying to regain its footing after a string of 2023 bank failures, one which could result in restrained lending.

“This is a logical response to a slowing economy and particularly to a scenario, where you’re seeing deposit outflows and you need to conserve cash,” said David Fanger, senior vice president at Moody’s rating agency

“What happened in March was a big wake-up call.”

What triggered U.S. banking crisis

U.S. banking crisis with the collapse of Silicon Valley Bank and Signature Bank in March triggered massive deposit withdrawals and placed renewed focus on lenders’ financial health. More recently, the banking crisis was triggered again by ratings downgrades when S&P last month cut credit ratings and revised its outlook for multiple U.S. banks, following a similar move by Moody’s.

Overall U.S. banks’ cash assets were $3.26 trillion as of Aug. 23, up 5.4% from the end of 2022. That was well above typical pre-pandemic levels, though down from the weeks immediately following the March 2023, bank failures, as per Federal Reserve data.

U.S. banks are holding on to cash

Cash assets at small and mid-sized lenders are up 12% compared with the start of the year; at the nation’s top 25 banks, cash holdings are up about 2.9%.

Bank failures led to rise and fall in deposit

Large banks including JPMorgan and Bank of America declined to comment beyond the disclosures, but pointed to their executives’ comments about reasons such as the Fed shrinking its balance sheet, falling deposits and higher short-term rates.

The SVB failure triggered a sudden dash for cash at banks, which within two weeks had bulked up cash assets to $3.49 trillion, the highest level since April 2022. That has pulled back since then but is still almost twice as high as pre-pandemic.

Banks need higher cash levels to meet liabilities as customers withdraw deposits, and to offset risks such as loan losses as the Federal Reserve keeps interest rates high to cool economic growth and inflation.

S&P forecasts 2% loan growth this year, after an almost 9% gain last year.

U.S. banking crisis continues

Mid-sized banks are also worried about upcoming regulations, analysts said.

U.S. regulators have said they will likely impose stricter capital and liquidity requirements on banks with $100 billion or more in assets.

Since March, regulatory focus has heightened, prompting banks to focus on key capabilities in liquidity and asset liability management, bankers and analysts said.

“Regulators are going to have a shorter fuse” for banks that have any gaps in managing their liquidity and the loans held on their books, said Peter Marshall, leader of EY’s financial services liquidity advisory group.

The Fed’s aggressive tightening since March 2022 put a lot of banks’ longer-term securities under water, creating investor anxiety over the health of bank balance sheets and bank failures.

Since then, banks are taking steps to boost liquidity by reducing investments in securities or selling them at a loss.

S&P estimated the value of these securities for FDIC-insured banks had more than $550 billion of unrealized losses on their available-for-sale and held-to-maturity securities as of June 30.

Can Regulatory intervention help overcome U.S. banking crisis

The regulators are working to overcome the U.S. banking crisis by strengthening the sector. They are planning to further increase the minimum levels of capital that must be held by large US banks (with assets worth more than US$100 billion (£79 billion)).

These plans to increase banks’ capacity to absorb losses are encouraging, though will take more than four years to fully implement. The Basel II international banking rules were introduced to a similar end in 2004, but were not implemented in time to prevent the global bank failures.

For the moment, the U.S. banking crisis remains with shocks within the financial system and more general calamities. It will still be a few months before we can say with confidence that the worst is over.

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