Gasparino: Powell’s Weak Bank Talk After Multiple Collapses

The US Banking System: Sound and Resilient or on the Brink of Collapse?

“The US banking system is sound and resilient,” Jerome Powell proudly stated, just days after the government took over First Republic Bank, marking the second-largest bank failure in US history. In our Fed chair’s world, First Republic is just another one-off, like Signature and Silicon Valley banks before it.

Sorry, one-offs (as Powell’s trying to frame First Republic) rarely come in threes, or fours if you count the ill-fated Credit Suisse’s forced merger with UBS by the Swiss.

The Latest Problem Child

Not long after Powell’s assurances, regional-bank stocks began to crash. Fox Business’s Eleanor Terrett and Charlie Brady reported that just in the past week, the sector is down 10%. For the year, regional-bank stocks are down 34.6% — compared to an 8.1% rise in the S&P 500.

The latest problem child appears to be LA-based PacWest Bancorp, with $40 billion in assets. It’s smaller than the $200-plus-billion at First Republic, but not insignificant, and its stock collapsed not long after Powell’s remarks. Shares recovered a bit Friday but not enough. They’re still down 82% from their 52-week high and its management continues to seek a white-knight savior.

The Main Culprit

The main culprit is, of course, higher interest rates. Also a lack of leadership. The Fed is the nation’s front-line bank regulator. But Wall Street appears to have less faith in Powell’s ability to stem the latest systemic threat to the US economy — a smoldering crisis threatening scores of midsized banks — than it had in his ability to foresee “transitory” ­inflation.

Ditto for Treasury Secretary Janet Yellen, another player in the bank regulatory apparatus. For weeks now, she’s also been telling the markets things are fine with our banks. Logic suggested quite the opposite, particularly at the regional-bank level where management collectively appears to have drunk from the same cup of Kool-Aid.

Banking is a Confidence Game

We can use a few George Baileys now. As word of risk-taking spreads, regional depositors are running for the exits. They’re draining the banks of their capital and sending them into insolvency because they don’t know what they’re backing up, such as increasingly depressed commercial real estate. Their execs hide behind a phalanx of Pollyannaish flacks who can’t be trusted with the truth. First Republic dodged important questions during its last analysts call that guaranteed its demise.

Powell and Yellen offer bromides, too, and a patchwork of short-term fixes. A shotgun marriage arranged by the Feds allowed JPMorgan to buy First Republic in receivership with oodles of government guarantees. It did nothing to stem worries about the system, as this past week’s events demonstrated.

No Quick Fixes

Sorry, there are no quick fixes for the pickle we’re in except possibly trying to avoid the sins of the past. We need Jerome Powell to turn into George Bailey and start telling the country some hard truths. The Fed printed money when it wasn’t necessary. The hyperlow interest rates of the past three years lasted much longer than the existential threat of those COVID lockdowns to the economy. And now the bill is coming due.

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