With the emergency lifeline provided by the Federal Reserve set to expire in March, banks across the country are facing an uncertain future. The Fed’s lending program, which was established in the wake of the Silicon Valley Bank’s collapse, has provided billions of dollars in emergency loans to struggling banks to help contain the damage caused by the banking crisis in 2023.
Known as the Bank Term Funding Program (BTFP), the program was designed to provide short-term loans to banks in order to help them maintain liquidity and stay afloat. Low-cost, one-year loans were offered through the program to banks that pledged collateral at full market value. By providing these loans, the Fed aimed to stabilize the banking sector and prevent a larger financial meltdown from occurring. However, with the program set to expire in March, vulnerable banks are now facing the possibility of being left without a safety net. This, according to experts, could lead to a new wave of bank failures, further exacerbating the country’s already fragile financial system.
Regional Banking Woes Loom Large
As the deadline for the expiry of BTFP nears, regional banks are grappling with the reality that they may soon be left to fend for themselves. Unlike larger, multinational banks, these community banks operate on a smaller scale and have fewer resources to withstand sudden shocks. This makes them particularly vulnerable to cash flow disruptions, which could jeopardize their ability to make loans and keep their doors open. Many of these banks have seen their balance sheets deteriorate over the past year as a wave of defaults and bankruptcies have hit the market. With dwindling profits and weakening loan portfolios, the prospect of losing access to emergency funding has put these banks on edge.
Among those deeply affected have been institutions like KeyBank, with their shares plummeting by nearly 90% year-on-year in the final quarter of 2023. Citizens Financial Group has not been spared either, with its stock down 70% in the same period — a somber reflection of the struggles faced by small banks across the country. In an unexpected turn of events, even New York Community Bancorp (NYCB), which was once hailed as the savior during the 2023 regional banking crisis by acquiring assets from the defunct Signature Bank, is now facing its own set of challenges. The NY-based lender’s stock plummeted in January, following the shock revelation of a $252 million net loss for the fourth quarter. Investors bristled at the news, leading to the largest one-day percentage drop in the company’s history, with shares closing 37% down.
These concerning developments reflect a grim reality for many banks, which are seeing their valuations shrink as investor confidence wanes. With high interest rates and rising delinquencies taking their toll on banks’ financial health, some are speculating that the days of these regional powerhouses may be numbered. While banks of all sizes have been affected, it is the smaller regional ones that are struggling the most to stay afloat. Handcuffed by the prevailing economic conditions and forced to shell out more interest to yield-hungry depositors, many small banks are facing a liquidity crunch, making it difficult for them to turn a profit. Against this backdrop, the question remains: what lies ahead for these struggling institutions?
The profitability of banks is closely tied to the Federal Reserve’s monetary policy, particularly the shifts in interest rates. On one hand, higher interest rates can lead to improved net interest margins — a significant source of income for these institutions. However, overarching monetary tightening often results in higher borrowing costs and can strain loan growth, which is a critical driver for banks’ profitability.
Amidst growing speculation, the key talking point in financial circles continues to revolve around the timing of the Federal Reserve’s next interest rate adjustment. If the Fed chooses to lower rates as a means of supporting economic growth, it could provide some relief for regional banks. However, hopes for a near-term rate cut were all but dashed following Fed Chair Jerome Powell’s remarks after the latest policy meeting. “We’ve said that we want to be more confident that inflation is moving down to 2%,” he said, adding that “it’s not likely that this committee will reach that level of confidence in time for the March meeting.” But even if the Fed does cut rates, some analysts warn that it may be too little and too late to rescue some struggling regional banks who are already facing multiple headwinds.
Understanding Regional Banks’ Influence on the Economy
With the Bank Term Funding Program (BTFP) set to expire in March, regional banks are bracing for what’s to come. Often referred to as the “Main Street” lenders, these institutions play an integral part of the US financial ecosystem, providing loans and capital to small- and medium-sized businesses that act as the engine of economic growth.
According to Goldman Sachs, regional banks —with assets below $250 billion—account for approximately half of the business loans aiding capital expenditures. They also originate 60% of U.S. mortgages, contribute to 80% of commercial real estate lending, and manage 45% of consumer loans. As a pivotal cog in the financial wheel, the relationship between regional banks and economic growth is inextricably linked, with the former often considered a bellwether of the latter. Given their symbiotic relationship, the end of the BTFP could spell trouble for both regional banks and the larger economy, according to some analysts.
“As with all its emergency fixes, the Fed is in a mighty pickle if it closes the BTFP,” warned Karen Petrou of Federal Financial Analytics. “Banks continue to sit on large unrealized losses and love this security blanket,” she added. In other words, the BTFP’s generous rates and low cost of funds provided a lifeline to regional banks that were struggling with legacy loan issues and declining profitability. Without the program, regional banks could find it harder to maintain their level of liquidity, should another bank crisis arise.
This decreased liquidity could have a knock-on effect, making it more difficult for businesses to access capital and spurring a slowdown in economic activity. But the consequences of a liquidity shortfall aren’t just limited to businesses. Consumers could also feel the impact through higher borrowing costs, while homeowners may see their property values decrease if the housing market slows down due to a lack of available mortgage loans. Perhaps even more concerning is the potential erosion of confidence in regional banking institutions. If consumers start doubting the solvency of these banks, it may lead to increased withdrawals or a hesitancy to deposit, which could exacerbate liquidity problems and potentially trigger a self-fulfilling prophecy of financial instability. Some experts warn that this doom-loop scenario could spiral into a second financial crisis, should regional banks become unable to maintain adequate liquidity levels.
Trust is the cornerstone of any banking relationship, and any signs of liquidity issues could prompt a crisis of confidence among depositors and investors alike. The bank run that precipitated the collapse of Silicon Valley Bank in March 2023 is a cautionary tale of how quickly things can unravel when trust in an institution is lost. As news spread about the bank’s sizable portfolio of long-dated bonds—which were impacted by rising interest rates—concerned customers began withdrawing their funds en masse. This sudden surge in withdrawals accelerated liquidity pressures, ultimately leading to a classic ‘run on the bank’ scenario. Despite the bank’s attempts to reassure customers of its financial health, the sudden withdrawal of deposits overwhelmed its liquidity position, resulting in it shuddering its doors for good.
Lessons from the Past: Precious Metals and the Banking Crisis of 2008
In light of these concerns, many Americans have begun exploring alternative options such as precious metals to help protect their savings. Unlike the fiat currencies held by traditional banks, precious metals like gold and silver have a long history of maintaining their value in times of financial crisis. Therefore, many have turned to this historically “safe-haven” asset during times of economic uncertainty. With emerging similarities to the banking crisis of 2008, looking back at the performance of precious metals during that time could provide valuable insights.
In the immediate aftermath of the crisis, gold prices surged to record highs, rallying by nearly 50%, as demand grew for this precious metal. Similarly, silver prices also saw an uptick, more than doubling in value within a few short years. While there were fluctuations and dips along the way, both gold and silver eventually recovered and surpassed their pre-crisis highs — a testament to their resilience and long-term value. Given the growing vulnerabilities in the banking sector and the expiration of the backstop of a “Bailout Fund for Troubled Protections” (BTFP), precious metals may once again prove to be a valuable tool for diversification and risk management. As the saying goes, “history tends to repeat itself,” and while no one can predict the future, the lessons learned from past events can be a valuable guide for protecting one’s hard-earned savings.
