Clearing the Danger Zone

It was just a little over five months ago when the biggest banking crisis since the Great Financial Crisis of 2008-09 started. It began with the failures of Silicon Valley Bank and Signature Bank. These were the second and third-largest bank failures in U.S. history.

The week after they failed, famed hedge fund manager Michael Burry posted a remarkable chart on his Twitter account, saying it was “a good chart/guide”, which he’s since deleted. Here’s a screenshot of that chart captured by Investing Whisperer:

The chart illustrates the relative risk of failure that various U.S. banks had at the time. It did that by showing how they compared to each other based on their percentage unrealized losses of capital that had been put at risk by the Federal Reserve’s then year-long series of interest rate hikes (on the horizontal axis) and the percentage of accounts at the banks with large deposits (on the vertical scale). The chart is divided into four zones by the median percentages for each measure.

What the Silicon Valley Bank and Signature Bank failures quickly demonstrated is that banks in the upper right zone of the chart were the most at risk of failing if they were to experience a run, having both more than 60% of their accounts with more than $250,000 in deposits and more than 30% in unrealized losses of capital from the Fed’s rate hikes.

Soon, a third bank that falls within this apparent danger zone was cleared from it. First Republic Bank (FRC) was acquired by J.P. Morgan Chase on 1 May 2023. That leaves just Comerica (NYSE: CMA) as the only remaining bank meeting the double criteria to fall within the danger zone.

In the months since however, it appears the danger zone has expanded to cover all banks at risk of unrealized losses of their capital invested in U.S. Treasuries because of the Federal Reserve’s rate hikes. on 25 July 2023, PacWest (PACW) was acquired by the smaller Banc of California (NYSE: BANC) in an action to rescue it.

Since then, both Fifth Third Bank (NASDAQ: FITB) and USBancorp (NYSE: USB) were downgraded by Moody’s because of their elevated risks. Both banks are positioned on the right side of Burry’s chart and are near the median threshold for large depositors that puts them at risk of the kind of run that Silicon Valley Bank experienced. Moody’s put several other banks positioned at or near the median lines edging the danger zone, Huntington Banc (NYSE: HBAN), KeyCorp (NYSE: KEY), Truist (NYSE: TFC), and Regions Financial (NYSE: RF) on its watchlist for potential future downgrades.

So far, only the “too-big-too-fail” banks whose stock symbols are indicated in purple fonts seem to be immune from the risk of downgrade or unexpected fire sale for falling on the high unrealized loss side of the chart.