As long as the Fed keeps tightening, the banking crisis will grow

Aggressive rate hikes and QT are reducing bank deposits and the value of bank assets - a combination that will see banking sector stress continue to grow.

Many believed that after First Republic Bank was dealt with, that the US banking crisis would fade away, with the “weak” links having now been dealt with.

Though on the contrary, as long as the Fed continues its aggressive tightening — which includes not just its aggressive interest rate rises, but also its quantitative tightening (QT) — banking sector stress will only continue to grow, leading to additional bank failures.

The market reaction in the four trading days since First Republic’s collapse, which has seen the SPDR S&P Regional Banking ETF (KRE), plunge 15.4%, has awakened many to this reality.

Fractional reserves make banks vulnerable to falling deposits

When an individual or business deposits money into a bank, the bank does not keep all of the cash locked away in a vault. In proportion to their customer deposit liabilities, banks instead only hold a fraction as cash assets, with the rest of their assets generally comprising of loans, or investments into securities such as Treas…