Michael Milken, a famous investor, said the present banking crisis started from an asset-liability mismatch that played out miserably. Milken said to CNBC about the banks that they should not have “borrowed short and lent long.”
Milken made a rare comment on the financial market. According to him, the banks had a lot of credit and equity, and they had a good ability to absorb credit losses that were coming. But, they doubled, tripled, and quadrupled their borrowing size overnight at low rates.
This week, The First Republic Bank became the 3rd failure of an American bank since March and the largest bank collapse since 2008’s financial crisis. The First Republic Bank saw a deposit flight. Its long-term assets fell in market value after several rate hikes. This triggered worries about losses on the balance sheet.
M. Milken believes there can be a slowdown in the percentage of loans owned by the banking system after the banking crisis.
Milken further said they will be stronger because they move into the hands of pension funds with long-term liabilities. People are focused on credit risk, but one of the major risks is the interest rate.
Amongst these bank failures, investors punished other lenders with the same characteristics.
Michael Milken acknowledged that the biggest banks in the U.S.A. displayed conservative risk management. This is in the middle of the increase in interest rates.
Milken also said that they should consider that their main banks exercised great caution on liability and asset management.
The banking crisis in the USA
Interestingly in March 2023, three U.S. banks failed. This triggered a decline in global bank stock prices. The regulators were swift to respond. This was to prevent a global banking crisis contagion.
The Signature Bank and Silvergate Bank both failed in the turbulent market.
Silicon Valley Bank failed too. The bank’s bonds had lost value as market interest rates increased after shifting its portfolio to longer-maturity bonds. The Silicon Valley Bank’s clientele was majorly technology companies and several wealthy individuals who held large deposits, but the FDIC did not insure the balances that exceeded dollar 250,000.
The U.S. federal bank regulators announced that extraordinary measures can be taken to ensure all deposits at SVB and Signature Bank are honored. The Fed or the Federal Reserves have established a Bank Term Funding Program. This is to offer loans of up to 1 year to eligible depository institutions.
By 16th March 2023, large interbank flows of funds shore up the bank balance sheets. Some analysts were talking of a broader U.S. banking crisis. The Fed discount window liquidity facility experienced about dollars 150 billion in borrowing from different banks by 16th March 2023.
Soon after Silicon Valley Bank’s failure, depositors began withdrawing cash from the First Republic Bank. And the First Republic Bank continued to destabilize. The bank stock price went down as the FDIC prepared to take the bank into receivership and find the bank a buyer. Finally, on 1st May, the Federal Deposit Insurance Corporation announced that the First Republic Bank was closed and the bank was sold to JPMorgan Chase.
About Michael Milken
Michael Robert Milken is a financier from America. Milken is well known for his major role in developing the market for junk or high-yielding bonds. He is a businessman and philanthropist also. Milken’s net worth is about $ 6 billion as of 2022, and he is among the richest people globally.
