Is the Banking Crisis Just Getting Started?

If Jamie Dimon were considering a career in fortune-telling, it may be wise for him to stick to his current job. After all, if someone of his expertise could be so incorrect about the ongoing banking turmoil in the US, one may question if he is right to lead one of the world’s largest financial institutions- especially since it’s at the core of government-led efforts to stabilize the entire system. Recently, JP Morgan’s boss came to the aid of First Republic- a California lender that was in crisis. He took the opportunity to announce to financial markets that this takeover signals the end of the crisis. However, he should know better than to speculate about matters he cannot control. Nevertheless, it’s understandable that Wall Street is reverential towards individuals like Mr. Dimon, to the point where they believe sheer willpower alone makes you invincible.

The rapidity with which Jamie Dimon’s words have returned to haunt him is surprising. Within just 48 hours, yet another regional American bank, PacWest, appeared to be on the brink of collapse – the fourth since March. Its shares plummeted by up to 60% in after-hours trading, prompting the bank to seek emergency funds or a buyer. Western Alliance, Zions Bancorp and Comerica also came under scrutiny, as investors scrambled to identify the financial system’s weakest links. PacWest had already raised $1.4bn from Atlas SP Partners, however, this did little to ease concerns about its financial condition. Like Signature Bank, Silicon Valley Bank and First Republic before it, PacWest may well end up with the US banking regulator. While Dimon can take comfort from the fact that many others have also made mistaken early reassurances, Federal Reserve Chairman Jerome Powell’s recent statement that the banking system is “sound and resilient” will be bewildering to PacWest’s shareholders, who are likely to lose out if the Federal Deposit Insurance Corporation intervenes again.

Despite Powell’s soothing words, the decision to raise borrowing costs again could lead to further material bank losses. The establishment’s reassurances about the safety of the banking system are founded on rigid metrics, but recent events have shown that those measures are not fool-proof. The experience of Credit Suisse, which met all capital requirements but was still crushed by sentiment and fear, is a warning. Bank runs are practically impossible to stop once customers take fright, and the system is arguably more vulnerable than ever in an era of social media and online banking. The mid-tier banking sector in America has managed to escape oversight and regulations, and concerns about bad loans and unrealised losses persist. Amid such fragility, a proposal to lift the deposit insurance cap from $250,000 sounds like a recipe for even more exuberance and the banking crisis may just be getting started. The question everyone should be asking is how bad it is likely to get.