May 08, 2023

U.S. Banking Channels and the Potential Economic Impact

In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer shares an update on the three recent bank failures, the drivers that have led us to this situation, the potential impact on broader economies and how you can protect yourself.


All right, so today I wanted to jump on and give an update as we sit here one week into May, roughly about what's going on in the U.S. banking channel. We saw, of course, a lot of turmoil breakout in the regional banking world in late March. Kind of calmed down a bit. We were all of course hoping that it was permanently calmed down. I think we knew there was some chance that we could see these issues drag on into the year and we saw a good bit of that last week. So wanted to jump on and kind of talk about where things are at, and then just hit on really only one point specifically on the investment side of things. So, this is a little bit more of an update, just getting folks up to speed about what's going on in the banking channel and potential impact on the broader economy as we look forward over the balance of 2023.

How Many Banks Have Failed in the U.S. This Year?

So at this point, we now have three banks, all fairly sizable, not the largest of the large, but decent size banks that have now failed, essentially being taken over by other banks. We could see more of those as we march forward here. I'll get into that here in a second. But we're now up to basically three that have failed through again here, sitting here in early, early May.

What Caused These Bank Failures?

So, let's jump back and talk about what the drivers were. Why did we see this breakout in early 2023? So, this is really all knock-on effects from the big, big increase in interest rates that we saw over the course of 2022. Again, just in general, interest rates were up anywhere from like 3% to 4% over the course of 2022, which is just essentially for the U.S. at least, an unprecedentedly large move in interest rates over the course of the year.

Many Banks Experienced Large Losses in Their Portfolios

So how did that translate into the banking channels? Anytime banks take in deposits from their depositors or somebody buys a CD, they of course have to decide what are we going to do with that money that's now been deposited with us or alone, to us. And a lot of those dollars went into fixed income security purchases. So buying bonds, things like treasury bonds, maybe mortgage securities. Investing a lot of those dollars before interest rates increased and therefore, they got to the end of 2022 and a large number of banks then had losses on those investments after those interest rate increases.

Majority of Deposits Exceeded FDIC Insurance

So, second dynamic that we had in play, because that alone was probably not enough to generate what we've seen so far here in 2023. The second factor was that a lot of the banks that we're talking about that the market is focused on, and this is not all the banks, but the banks that the market is focused on are banks where a lot of those deposits were above FDIC insurance limits. So those depositors had a motivation then if they think the bank is potentially in trouble to pull out their deposits because the deposits that are above FDIC limits would be at risk if something were to happen to the bank. So essentially what we've seen is the banks that the market has been focused on, the banks that have failed, the banks that have seen their stock prices decrease a lot are essentially banks that one had losses on some portion of their portfolio, but also typically had a large depositor base above FDIC insurance limits.

What May We Expect Moving Forward?

So, let's move into what we might see as we go forward here. So couple things to reiterate that I know we've mentioned before that do make this meaningfully different from the big financial crisis that we had back in '07/'09, at least meaningfully different up to now is that the issues do seem to be limited to kind of small and medium sized banks versus the larger banks. And the issues here driven more by what's happened with interest rates versus credit related losses on loans. So, I think those are a couple of big, big differences. We've talked about, you know, one of the dynamics that could lead to this continuing and seeing other, you know, banks run into similar issues that, of course a lot of banks do have losses on the loan side of their portfolio. So, we could see this issue linger on for a bit. Would not surprise me. Also, wouldn't surprise me if we saw it calm back down significantly but there's still risk out there is the point that I would make.

Could Bank Failures Fuel Recession Fears?

Maybe most importantly for the economy, I would expect this has heightened the risk of recessionary-related outcomes later in the year. Anytime you have a shock like this to the banking channel, you're typically going to see the banks, of course, that were directly impacted, are gonna pull back from lending. But you also tend to see banks that weren't as directly impacted pull back from lending and that can slow down the economy. So certainly, markets are aware that there is some increased risk at this point of recession toward the end of the year.

Guidance for Depositors Worried About Future Bank Failures

On the investor side, really only one thing to leave you with today, which is a reminder to continue to stay below FDIC coverage limits with any deposit CDs that you would have at banks. I think that's far away the most pertinent thing coming out of this for the folks that we work with is to always be cognizant of where your deposits and CD related investments would fall relative to those FDIC coverage limits. If you have additional questions you'd like for us to tackle, feel free to share those with your advisor and they'll pass those along or click the link below and submit questions in that way. Thanks.

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About the Author

Jared Kizer

Head of Investment Research

Jared Kizer is the Head of Investment Research for Buckingham Wealth Partners. In 2008, Jared co-authored the book "The Only Guide to Alternative Investments You’ll Ever Need" with financial author Larry Swedroe. Jared has written several articles on such topics as retirement planning and investment policy. His work has been published in The Journal of Portfolio Management, Journal of Indexes and Jared has made appearances on local and national television, including Bloomberg Television.

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