Banking crisis concerns persist in US amid crypto blame game

US small lenders aren’t still out of the woods as the financial stress that caused several failures in the sector earlier this year persists. There are signs that another banking crisis could be in the making, BitMEX’s co-founder Arthur Hays said. Meanwhile, a Fed official recently attributed the collapse of Silvergate Bank partly due to its dependency on crypto assets.  

Small Bank Index shows fragility 

Banking indices that gauge the health of small regional banks are still weak after the April crisis. Businessman and crypto exchange BitMEX's chief, Arthur Hayes, expressed concerns about the sector stability in a tweet. 

Hayes said that October is about to be "REKTober," doing a wordplay on what he thinks is an impending banking crisis. Hayes attributed the bank failures seen earlier this year to actions by US Federal Reserve chief Jerome Powell and Secretary of the US Treasury Janet Yellen. 

Hayes underlined the rise in the 2-year and 30-year Treasury yield spread, which he thinks will negatively impact bank stocks.

Hayes said the Small Bank Index is only 8% above its April lows.Small bank indices are designed to monitor the performance of smaller lenders or regional banks. In the tweet, Arthur Hayes shows the relationship between T-bill yields and the BKX Small Bank Index, which is the KBW Regional Banking Index.

Fed blames crypto for Silvergate liquidation

The Federal Reserve recently placed the blame on Silvergate Bank's exposure to crypto assets for its liquidation. According to the document by the bank, "Silvergate’s concentration in crypto industry deposit customers, rapid growth, and multilayered funding risks led to the bank’s voluntary liquidation."

However, the Small Bank Index's weakness suggests broader issues within the sector, unrelated to crypto. A Reuters report showed in September that US lenders were stockpiling cash due to liquidity concerns and deposit outflows, indicating deeper problems.

In response, David Fanger, Senior Vice President at Moody's rating agency, said that preserving cash is a reasonable course of action given the economic slowdown and the situation of experiencing deposit outflows. This implies that liquidity, more than crypto, is a concern for small banks.

The crisis began with the failure of Silicon Valley Bank in March 2023. Meanwhile, the fragility of small banks is a cause of economic concern in the US. With financial conditions expected to tighten even further, analysts see another crisis triggering a recession.