It’s barely been a year since the 2023 bank crisis in which several large banks, including Silicon Valley Bank and Signature Bank, failed.
At the time, I wrote that the bank failures weren’t over, and that there would be more.
But it’s been quiet for most of the last year; the banking system has been pretty calm thanks in large part to an emergency program that the Federal Reserve created to bail out other troubled banks.
They called the Bank Term Funding Program (BTFP), and it essentially expired a few weeks ago. In other words, no more emergency lending to troubled banks.
Barely a month later, we have already witnessed our first casualty: Pennsylvania-based Republic First (not to be confused with First Republic, which failed last year) was shut down by regulators on Friday afternoon.
Republic First had the same issues as the others that failed last year — too many ‘unrealized bond losses’ on their balance sheet.
Just like Silicon Valley Bank, Signature Bank, etc. last year, Republic First had used their customers’ deposits to buy US Treasury bonds in 2021 and 2022, back when bond prices were at all-time highs.
By early 2023, the situation had reversed. Bond prices had plummeted; even supposedly ‘safe’ and ‘stable’ US Treasury bonds had fallen substantially in price, and banks were sitting on huge losses.
Remember that bonds prices fall when interest rates rise. So when the Fed jacked up interest rates from 0% to 5% in an attempt to control inflation, they were simultaneously creating huge losses in the bond market… which also meant huge losses for banks.
Silicon Valley Bank was just the tip of the iceberg. Plenty of other banks (including Bank of America) had racked up enormous bond losses. In fact the total unrealized losses in the banking sector last year amounted to a whopping $620 billion.
The Fed knew they had an enormous problem on their hands. So they created this Bank Term Funding Program, which was basically a giant game of ‘make believe’.
Through the BTFP, banks were allowed to borrow money from the Fed using their cratering bond portfolios as collateral. But instead of valuing the bonds at the actual market price, everyone simply pretended that the bonds were still worth 100 cents on the dollar.
In other words, the banks just made up prices for their assets, and the Fed allowed them to do it.