Money stimulus and the price US banks pay on the profligate availability of cash during 2020–2023

During Covid, US Government stimulated the national economy with up to 6 trillion USD through a variety of rebates, subsidies and monetary infusion, USD 1,8 trillion of them coming via direct stimulus cheques — that then flooded numerous verticals from retail investment and trading to gaming, NFT and crypto.

It clogged the banking coffers, that chose the best available instrument to put the money they were given — long-term securities, contributing better return vs. other volatile channels.

The aversion to credit amid unpredictability led to substantial depression in loan-to-deposit ratio, akin to phlegmatic market of Japan.

This choice came to bite long term and where for some the pain is manageable, given more diverse liability side of their balance sheet, some concentrated players came to pay dearly.

From history:

It reminds a bit of a Savings and Loans debacle in 1985–1995: where alongside 1/3 of the savings and loans “thrifts” (community saving unions) during the 1980–1994 period, 1,617 FDIC-insured commercial and savings banks were closed or received FDIC financial assistance = 9.14% of the sum of all banks existing at the end of 1979 plus all banks chartered during the subsequent 15 years.

Where the micro-economic details of the crisis were different (reliance on real-estate), the macro-economic conditions that triggered the failing of the system were somewhat similar: the rates increase to contain inflationary pressures conflicted with bank’s long positions on commercial real-estate.

The ensuing period led to substantial consolidation.

More below in the FDIC report: