As expected in the financial world, Federal Reserve Chairman Jerome Powell announced no interest rate hikes or cuts. However, March’s Consumer Price Index (CPI) rose by 3.5%, surpassing expectations and accelerating inflation.

The sudden surge in inflation is exerting pressure on banking institutions, leading to visible strains such as the significant losses reported by New York Community Bank (NYSE: NYCB) and Softbank Group (OTCMKTS: SFTBY), which may necessitate intervention.

Responding to these alarming developments, consulting firm Klaros Group undertook a comprehensive analysis of 4,000 US banks to evaluate their vulnerability to failure.

The results of the survey were concerning

Out of 4,000 US banks, 282 were identified as facing risks from commercial real estate loans and potential losses due to higher interest rates. Most of these banks are smaller institutions with assets totaling less than $10 billion.

According to Brian Graham, co-founder and partner at Klaros Group, these banks are under stress but not insolvent. However, their challenges could have subtle effects on communities and customers. Graham highlighted potential impacts like reduced investment in new branches, technology, or staff.

Former chair of the US Federal Deposit Insurance, Sheila Bair, explained that while individuals’ deposits are generally protected up to $250,000 per depositor per insured bank, the indirect consequences of small bank failures could still affect communities and customers.

The regional bank crisis seems far from over

Last week, US small bank cash reserves took a significant hit, dropping by $258 billion, falling below the level typically considered a constraint. 

This figure doesn’t include the $126 billion still held in the Fed’s emergency lending program, which expired in March. This decline represents the most significant drop in bank deposits since April 2022, when $336 billion exited the banking system. 

In a related development, regulators seized Republic First Bank on Friday, with plans to sell it to Fulton Bank (NASDAQ: FULT), another regional bank with $6 billion in total assets. The FDIC estimates that the failure will cost the fund approximately $667 million.

Small bank cash reserves. Source: The Kobeissi Letter
Small bank cash reserves. Source: The Kobeissi Letter

Diminished cash reserves and repeated government interventions indicate that the banking sector has significant weaknesses that could seriously affect the economy.



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