EDITORIAL: The market has clearly rejected the rhetoric that problems at SVB (Silicon Valley Bank), Signature Bank and lately First Republic were “essentially one-offs” and “going forward, JP Morgan taking over First Republic does put that chapter behind the industry,” according to Citigroup’s risk management executives as they echoed sentiment at the FDIC (Federal Deposit Insurance Corp.).

For, just the day after the buyout, PacWest Bancorp and Western Alliance Bancorp – which investors had red-flagged after the run on SVB – dropped 28 percent and 15 percent respectively, triggering multiple volatility halts, as they led a deep selloff in US lenders on Tuesday, chopping 5.5 percent off the KBW (Keefe, Bruyette and Woods) Regional Banking Index in the process.

That’s not all. New York-based Metropolitan Bank Holding Corp also lost 20 percent on the same day, renewing fears about the health of the financial system with the US economy teetering on the brink of recession and the Federal Reserve’s shift in monetary policy pressuring banks to increase interest payments to retain deposits.

The sudden spike in inflation and interest rates to levels not seen in 40 years has also led to unrealised losses due to extensive Treasury holdings that continue to diminish in value, unravelling the traditional safe haven trade and undermining the US bond market’s sovereign guarantee.

To top it all, FDIC’s focus on securing big bank deposits has triggered a frantic depositor rush away from mid-sized banks to the safety of only the biggest ones, leaving the main drivers of the free market economy to face a very uncertain future and falling share prices that the monetary sector’s fancy statements do little to address.

There can also be no denying that the turn in the interest rate cycle has exposed banking sector fragility on both sides of the Atlantic; and that the late-March shotgun marriage between UBS and Credit Suisse might not succeed in preventing contagion in Europe because of signs of severe distress in Deutsche Bank, which could well pull down Germany’s economy, the financial pillar of the EU.

With the US economy only a couple of quarters away from another recession, by most estimates, more banks are likely to come under increasing stress, even go under, and deprive the market of liquidity when it will need it the most. Yet these are the fruits of greater deregulation and uninsured deposits that banks themselves lobbied for relentlessly when they thought – very unwisely as it turns out – that the low interest rate regime would last forever.

Now no matter how much authorities try to gloss over these issues, there can be little denying that a series of mid-sized bank runs is a very real possibility across the US as well as the EU.

Part of the present uncertainty stems from FDIC’s delay in announcing a change to deposit insurance, which was expected alongside the First Republic receivership process but never came; perhaps because it is still gauging the severity of the problem.

It’s hard to deny that a looming recession, the dollar’s new troubles in international trade and a clear implosion of the American banking sector, are together beginning to sound like what could be the death rattle of the global financial order in place since the collapse of the Bretton Woods system. If that really turns out to be the case, the entire world economy will have to brace for a series of shocks.

That is very bad news for countries like Pakistan, especially, where the political elite, starting with the government, seems blissfully unaware of these seismic shifts and remains so consumed by its lust for power and privileges that it is making the entire country sleepwalk into a nightmare scenario.

Copyright Business Recorder, 2023