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Banking-System Distress Is Likely Greater Than It Appears, Say Analysts

Isaac Nuriani    |
Apr 7, 2023
  • Gold crosses above $2,000 as analysts say banking crisis could be systemic.
  • Stress tests unable to catch what brought down Silicon Valley Bank.
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For many, fears of a genuine, systemic banking crisis appear to be subsiding.[1] However, there are strong suspicions from credible experts that fundamental weakness in the financial system is a bigger issue than suggested by the recent upheaval.

For example, a recent, comprehensive study by economists at Yale University and Boston College concludes the problems with the banking system may run particularly deep. The basis for their conclusion has to do with the level of regulatory intervention demonstrated recently in both the U.S. and Europe. In the authors’ assessment, the size and scope of these interventions signal that the current turmoil actually may be a systemic event.

Along the same lines, JPMorgan CEO Jamie Dimon recently suggested in his annual report to shareholders that not only is the current banking crisis not over, but that even when it is, the fallout will last for years.

In his report, Dimon highlights what he and others see as the two principal factors that brought Silicon Valley Bank and Signature to their knees, emphasizing there are no regulatory provisions in place to help ensure those factors don’t cause problems again in the future.

We’re going to spend some time this week going over what Jamie Dimon had to say to his shareholders about the banking crisis. We’ll discuss the factors he said were so central to the recent failures. We’re also going to dig into the study I referenced to understand just why the authors seem so certain that recent turmoil could indicate bigger problems for the banking system.

In my view, the implied messages sent by each of these positions on the banking crisis are clear: The financial system on which we rely so heavily, and which we assume is high-functioning, may not be as sound as so many of us assumed it was. Also, even when the dust settles on this round of turbulence, the inherent nature of that system is such that the risk will still be there for depositors – especially those who are uninsured and retirement savers whose nest eggs depend so much on the banking waters staying calm.

Economists: We Might Be “Already in the Midst of a Systemic Event”

Noted investment analyst Mark Hulbert has a message for those who see the recent turbulence churning through the banking system as a passing event:

They’re kidding themselves if they think the banking crisis is over. In fact, the current crisis looks far more serious than is evident.[2]

Hulbert was prompted to make that comment after reviewing a recently published study co-authored by economists Andrew Metrick of Yale University and Paul Schmelzing of Boston College.

The study, titled “The March 2023 bank interventions in long-run context – Silicon Valley Bank and beyond,” examined nearly 2,000 banking-sector interventions in 138 countries going back to the 13th century. The purpose of the research was to evaluate the severity and implications of the recent banking turmoil by comparing the overall level of current regulatory intervention with historic regulatory actions.[3]

The authors’ conclusion? The current crisis is bad…and could get much worse from here. That’s pretty straightforward.

The research of Metrick and Schmelzing reveals that the combination of account-guarantee and emergency-lending interventions the government robustly applied during the March 2023 crisis is unique in the history of banking crises. In fact, this combination of interventions has been applied to a total of 57 banking crises in history – just 6.5% of all such crises.[4]

Of particular note is the size of the recent interventions. According to the research, the emergency lending by the Swiss National Bank to both Credit Suisse and UBS totaled slightly more than 25% of Switzerland’s GDP. That represents one of the largest interventions in history, dwarfing the size of the median intervention as a percentage of GDP – just 1.5%.[5]

As a percentage of U.S. GDP, the size of the interventions initiated so far by regulators in this country for deposit guarantees has been considerably smaller. Still, they’re the second-largest in U.S. history. Only those doled out during the 2008 financial crisis amounted to more.[6]

In an interview with MarketWatch about the findings, Schmelzing said:

We don’t directly know how bad things really are right now in the banking system. But we can look at the behavior of the regulators who presumably know a lot more than we do about how bad it is. And the pattern of their responses most closely matches that of 57 prior crises that tended to more severe than average.[7]

The economists’ official conclusion of their research is that “the March 2023 pattern of interventions strongly suggests we are already in the midst of a systemic event.”[8]

As for how conditions evolve from here, Schmelzing told MarketWatch that while there’s no way to know for sure, large-scale banking crises “play out over many months, if not years. It’s far too early for investors to say that the crisis is over.”[9]

For his part, JPMorgan CEO Jamie Dimon also says the crisis isn’t over, and that even when it is, “there will be repercussions from it for years to come.” Dimon says the primary triggers of the unrest go beyond regulatory oversight and underscore the reality that banking and risk will always walk hand in hand.[10]

Dimon: Bank Stress Tests Couldn’t Catch What Toppled Silicon Valley Bank

“Risks are abundant,” Dimon told shareholders in his report, “and managing those risks requires constant and vigilant scrutiny as the world evolves.”[11]

Constant and vigilant scrutiny from everyone, he means. Because risk in banking is so pervasive, regulatory oversight by itself isn’t enough to effectively mitigate it.

And Dimon makes it clear that the main landmines that quickly weakened and ultimately killed Silicon Valley Bank could not be detected by regulatory stress tests. That’s because the stress tests are not set up to ferret them out.

One of those landmines is that nearly all of Silicon Valley’s deposits – 94%, to be exact – were uninsured (the bank’s percentage of uninsured deposits was an equally jaw-dropping 90%).[12]

Here’s why that’s such a problem: It’s much less likely that insured depositors will play a significant role in a bank run, because their money is, well, insured. Uninsured depositors, however, are a different story.

Uninsured depositors can’t be certain they’ll get their money back if a bank fails. Which means if word gets out that a bank is in trouble, uninsured depositors likely will line up as fast as they can to take their money out. And when nearly 100% of a bank’s deposits are uninsured, that makes the bank particularly vulnerable to failure on the heels of a run.

But stress tests don’t really send up a red flag when a high percentage of bank deposits are uninsured.[13] In the case of Silicon Valley, that doesn’t mean the bank’s own risk management personnel should not have been paying attention to what the implications of an astoundingly high percentage of uninsured deposits could be – particularly when those uninsured deposits all came from the same industry (tech-startup venture capital).[14] But that involves self-regulation…and we all know how that sometimes can go.

Also playing a significant role in the failure of Silicon Valley Bank was the impact of fast-rising interest rates on the bank’s hold-to-maturity portfolios (long-term bond portfolios) – yet another “distress trigger” that Dimon points out isn’t identified by standard regulatory oversight.

“Ironically,” says Dimon, “banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements. Even worse, the stress testing based on the scenario devised by the Federal Reserve Board (the Fed) never incorporated interest rates at higher levels.”[15]

It remains to be seen what, if any, regulatory changes are made to further help limit the chances of bank failures and the prospect of contagion spreading throughout the financial system. However, as we’ve discussed in this article, not only is the final chapter of this banking crisis likely yet to be written, but even when it is the threat posed by systemic instability is likely to be ever-present in spite of regulatory reform because, as Jamie Dimon says, “Risks are abundant.”


[1] U.S. News & World Report, “Marketmind: Calm Returns: Investors Switch to Bank Fundamentals” (March 28, 2023, accessed 4/6/23).
[2] Mark Hulbert, MarketWatch, “Silicon Valley Bank’s failure isn’t the end of the banking crisis. History says it just might be the start.” (April 4, 2023, accessed 4/6/23).
[3] Andrew Metrick and Paul Schmelzing, National Bureau of Economic Research, “The March 2023 bank interventions in long-run context – Silicon Valley Bank and beyond” (March 2023, accessed 4/6/23).
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Hulbert, “Silicon Valley Bank’s failure isn’t the end of the banking crisis.”
[8] Metrick and Schmelzing, “The March 2023 bank interventions in long-run context.”
[9] Hulbert, “Silicon Valley Bank’s failure isn’t the end of the banking crisis.”
[10] Jamie Dimon, JPMorgan Chase & Co., “Annual Report 2022 – Chairman & CEO Letter to Shareholders” (April 4, 2023, accessed 4/6/23).
[11] Ibid.
[12] Felix Salmon, Axios.com, “Why failed Silicon Valley Bank was an outlier” (March 15, 2023, accessed 4/6/23).
[13] Zoe Sagalow, S&P Global Market Intelligence, “Liquidity, deposit concentration among regulatory targets after bank failures” (March 15, 2023, accessed 4/6/23).
[14] Ibid.
[15] Dimon, “Annual Report 2022.”
[16] Matt Grossman, Wall Street Journal, “Dozens of Banks May Have Risks Similar to Silicon Valley Bank, Economists Find” (March 17, 2023, accessed 4/6/23).
[17] CNBC.com, “Gold COMEX (Jun′23)” (accessed 4/6/23).
[18] CNBC.com, “Gold, silver soar as Silicon Valley Bank collapse spurs flight to safety” (March 13, 2023, accessed 4/6/23).
[19] CNBC.com, “Silver COMEX (May′23)” (accessed 4/6/23).




















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