These banks failed due to poor interest-rate risk management. In other words, they took on extra risk on their balance sheets in the form of long-maturity, higher-yielding Treasuries. This risk paid off with higher realized income and profits until depositors realized the banks had risky balance sheets and then demanded the return of their deposits. As public trust eroded, a classic bank run followed. The run was expedited by a concentrated deposit base and electronic banking, which forced the banks to rapidly sell their Treasuries at losses to meet depositors’ demands. These banks gambled and lost.

Angus: Did the entire system behave in this manner?

Amy: No, but speculation about the rest of the sector rapidly spread through other banks, as seen in the graph above. In many cases, unfairly, the stocks of some regional banks have been more volatile than the actual deposit base. In contrast, JPMorgan Chase & Co, with the largest deposit base in the country, managed to stay above the fray and take share. Following the Great Financial Crisis, our largest financial institutions deemed “too big to fail”, including JPMorgan Chase & Co were
heavily regulated while regional banks have received less scrutiny.

Angus: Is the bank crisis over? What are the consequences?

Amy: There may be additional regional banks that suffer from their poor management practices, but in general, most are considered good risk managers and play a crucial role in the growth of local economies. Going forward, regionals should now expect more scrutiny from regulators. Additionally, funding csts will grow to attract deposits, making the sector less profitable. FDIC fees will rise for the biggest banks, to absorb the cost of the bank failures listed above. Consolidation is also likely, as
stronger banks acquire the weak or poorly managed ones. Finally, as the economy slows, investors’ concerns will turn to commercial real estate loan exposure within both the large and regional banking sectors.