In April, the S&P 500 index rallied 1.2 percent despite the Federal Deposit Insurance Corporation (FDIC) grappling with the third US bank failure in less than two months. First Republic Bank was the latest to fail, but the FDIC arranged for JP Morgan to acquire the majority of its assets under a “loss-sharing agreement,” with the FDIC providing $50 billion in financing to JP Morgan. This followed the failures of Silicon Valley Bank, Silvergate Bank, Signature Bank, and the Swiss National Bank’s orchestration of up to 100 billion Swiss francs in “liquidity assistance” to UBS for the takeover of Credit Suisse.
While the US Treasury Department’s spokesperson stated that “the banking system remains sound and resilient, and Americans should feel confident in the safety of their deposits and the ability of the banking system to fulfill its essential function of providing credit to businesses and families,” the reality is that the bank problem has not been entirely resolved. Many banks have invested heavily in bonds, which have depreciated in value due to the 20-fold increase in the federal funds rate within a year.
Consequently, many bank balance sheets are plagued with large unrealized losses, and as confidence erodes, insolvency becomes a real issue, with deposits leaving.