EPB Research: These Banks Are Next…

The second, third, and fourth-largest bank failures in U.S. history have occurred so far this year. That suggests the financial system is anything but healthy. And that more issues are likely to occur before things calm down again.

A number of regional banks are under pressure. These banks are dealing with depositor outflows, and a potential mismatch in asset duration. Simply put, they may own assets like Treasuries that are usually safe. But not if they must be sold immediately.

To combat the possibility of further failures, the Federal Reserve has created a bank funding program. This allows banks to sell assets at par value.

In turn, they can receive cash. Even if the current value of those assets are well under par.

In the meantime, banks are unlikely to make money right now.

That’s because rising interest rates have cut into bank profitability as deposit rates have also had to rise. And borrowers have been more reluctant to borrow at current interest rates.

Some regional banks have already cut dividends to preserve capital. And they’re updating investors on deposit activity.

But given the low profitability in the sector right now, it’s clear that there will likely be more bank failures ahead this year. As that happens, expect a further stock market selloff.

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