Banking crisis re-emerges

The bad omens of the failure of Citizens Bank

From Tuomas Malinen’s Forecasting Newsletter.

Issues discussed:

• The failure of Citizens Bank sends another dire warning on the state of the U.S. banking system.

• Loan losses are mounting in the balance sheets of banks.

• Worrying similarities between current situation and the developments that led to the devastating bank runs of early 1930’s (the Great Depression) keep on building.

“Whatever happens to First Republic, I hope everyone finally understand that the banking crisis will be with us for a long time, and that we have yet to see the worst of it”.

This was the last line of my piece detailing the fate of First Republic Bank published on 28 April. First Republic was heavily invested to commercial real estate and failed as a result. On Friday past week, we received another bank ‘corpse’, when Citizens Bank failed in Iowa and was taken over by the Federal Deposit Insurance Corporation (FDIC).

Citizens Bank was a small local operator with one full-service branch and a drive-up facility in Sac City, Iowa. The bank held around 10% of the $530 million deposit market available at Sac City. However, much more important than the size of the failure, is the reason why the bank failed.

We had flagged the Citizens Bank in May, when we run simulations on different scenarios of loan losses for U.S. banks. Unfortunately, Citizens was not among the list 200 worst U.S. banks, published on 5 May (it was #297). This stresses the need to deliver a broader swath of our analysis on U.S. banking safety in the future. We will heed the lesson of this.

We will start to mull through the Q3 U.S. banking data next week. We will go through loan delinquency rates and run simulations using different loan loss scenarios in an effort to build a comprehensive picture of the U.S. banks at the risk of failing vs. those that are the most safe.

More so, because the failures of First Republic Bank and Citizens Bank are harbingers of some serious banking troubles, which we expect to hit the U.S. within the next few months. Let’s learn, why.

Loan losses