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  • Writer's pictureSieracki Milosz

Is a US Banking Crisis Looming? Insights from BitMEX's Arthur Hayes

Usa street, banks, flags, market charts, wall street

In recent times, the stability of the United States' small-sized lenders has come under scrutiny, with growing concerns that a banking crisis might be on the horizon. BitMEX's co-founder, Arthur Hayes, has been a vocal advocate of this viewpoint, and the Small Bank Index's performance seems to reinforce his apprehensions. In this article, we delve into the factors contributing to this potential crisis, the role of cryptocurrency, and the implications for the broader financial landscape.

The Small Bank Index: A Measure of Fragility

The Small Bank Index, which serves as a barometer for the health of small regional banks in the US, is currently only 8% above its April lows. This sobering statistic, highlighted by Arthur Hayes, indicates a lingering fragility within the sector. It's important to note that small banks play a vital role in local economies, serving as a source of credit for businesses and individuals alike. Any disturbance in their stability can have far-reaching consequences.

Hayes has coined the term "REKTober," playing on the word 'reckoning,' to suggest an impending banking crisis. He attributes the failures witnessed earlier this year to actions taken by Jerome Powell, the US Federal Reserve chief, and Janet Yellen, the Secretary of the US Treasury. One of the key concerns he emphasizes is the rise in the 2-year and 30-year Treasury yield spread, which he believes could negatively impact bank stocks.

Crypto Assets and Silvergate Bank's Liquidation

The Federal Reserve recently pointed a finger at the cryptocurrency industry as a contributing factor to Silvergate Bank's liquidation. According to the central bank, "Silvergate’s concentration in crypto industry deposit customers, rapid growth, and multilayered funding risks led to the bank’s voluntary liquidation." While this might seem like a definitive explanation, it's crucial to recognize that the weakness in the Small Bank Index suggests that broader issues within the sector go beyond cryptocurrency.

A September report by Reuters shed light on another concerning trend: US lenders were accumulating cash reserves due to liquidity concerns and deposit outflows. This implies that the sector's primary concern is liquidity, rather than the influence of cryptocurrency. David Fanger, Senior Vice President at Moody's rating agency, supported this notion by stating that preserving cash is a reasonable course of action in light of economic slowdown and deposit outflows. In essence, liquidity concerns are paramount for small banks.

The Trigger: Silicon Valley Bank's Failure

The chain reaction leading to the potential banking crisis in the US began with the failure of Silicon Valley Bank in March 2023. This event sent ripples through the financial sector, raising alarm bells among analysts and experts. The fragility of small banks has become a major cause for economic concern in the nation.

As financial conditions are expected to tighten even further, many analysts see the looming crisis as a potential catalyst for a recession. The interconnectedness of the banking industry means that a crisis in small banks could have cascading effects throughout the broader financial landscape. It's crucial to address the issues at hand and implement measures to mitigate the risk of a full-blown banking crisis.

Endnote: Navigating Uncertain Waters

In conclusion, the concerns raised by BitMEX's Arthur Hayes regarding a potential banking crisis in the United States should not be taken lightly. The Small Bank Index's precarious position and the recent failures in the sector, including Silvergate Bank's liquidation, underscore the fragility of small-sized lenders. While cryptocurrency may have played a role in some instances, it's evident that broader issues related to liquidity and economic slowdown are contributing factors.

The failure of Silicon Valley Bank serves as a stark reminder of the risks facing the banking industry. As we navigate these uncertain waters, it's imperative for regulatory authorities, financial institutions, and policymakers to work collaboratively to strengthen the stability of small banks. Failure to do so could lead to dire consequences for the US economy as a whole.

In this challenging landscape, it's essential for investors, businesses, and individuals to stay informed and monitor developments closely. The future of the US banking sector hinges on how effectively these issues are addressed and resolved.

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