As near as I can tell someone came up with the bright idea of these banks buying long term treasuries. That under the accounting rules this would still count toward the amount of money they need to keep on hand. It gave them a small extra amount of profit somehow and everything seemed OK. This spread as a common practice at the regional banks.
Then when inflation hit and interest rates climbed those long term treasuries were worth half of what they were originally purchased for. Now if the customers don't need their money back, no big deal, you just wait out the 10 years and get all your money back. But if enough money starts leaving the bank and now you are forced to sell off those 10 year treasuries at present value you go bankrupt rather quickly.
Had these banks kept their reserves in a ladder of short term treasuries there wouldn't have been a problem. You can likely set up the cash flow to maximize getting your full amount of money out of the short terms.
I have never seen an article as to why this practice was so wide spread in the industry. I suspect the Fed needed buyers of the long term and convinced the regionals they would have their back.
The fed for a while was floating many of these regional banks by covering their long term exposure under the Bank Term Funding Program but that ended back in March 2024.
The kicker on this from what I have read is the FDIC doesn't have enough money to cover all the regional banks that will fail. That's why they are working out sales of assets to kick the can down the road so to speak. But as we saw with the deal the FDIC put together for Signature bank last year, New York Community Bank (the new owner of Signature's assets) is now having trouble.
Sounds like it was planned.
They were stupid to fall for it.
Bidenpression.
I would agree with your assessment. Adding:
1. Commercial real estate actions (planned out in the past 20 years) didn’t really calculate the pain off Covid and serious downturns in property use/value. You see a number of small mall operations, store-fronts, and even hotels which are failing....going back to the ownership of the bank. In this case, even if they take it and resell...I doubt if you get more than 50-percent of the previous accepted value.
2. Car repossess actions on the upswing. Lot of stupid people buying $75,000 cars on a 8-year plan, with only 20-percent down. They run into a crisis period at work/office, and miss three or four payments. Bank takes over a 4-year old car, which has maybe 60-percent of the original value, and can never get what they loaned back.
3. Because of car loan issues...rejection of car loans is presently around 20-percent...meaning fewer people being accepted than ever before.
4. Even if you see some regional bank swallowed up by a mid-sized operation...it doesn’t mean the branches still continue to exist. Look around....large number of bank structures empty.
Lot of signals that show a relationship to 1929. Hobo-traffic of that era...very much existing in homeless traffic today.
“ I have never seen an article as to why this practice was so wide spread in the industry.”
Reserves are highly regulated. Government debt is considered a “safe harbor” (free from regulatory problems) for banks. When yields for short term treasuries was near zero 10 year rates at 1% or so looked attractive at the time.
Some banks overdid it.