U.S. Banking Stocks Remain Depressed Because of Looming Midsize Banks’ Bankruptcies and $1T National Debt Issuance Hangover

The S&P Banks Select Industry Index (Bloomberg Ticker: SPSIBK) is sharply down today, on June 6, by 2.23% so far to 786.07. The Index comprises stocks in the S&P Total Market Index that are classified in the GICS asset management & custody banks, diversified banks, regional banks, other diversified financial services and thrifts & mortgage finance sub-industries.

Why are the U.S. banking stocks remain under siege?

The Treasury General Account — effectively the government checking account — has been all but depleted in recent months because of the lurking debt ceiling crisis. As a result, the U.S. government may need to issue as much as $1 trillion in national debt over the next 6 months to bring the balance back to historical levels while continuing to meet day-to-day needs. Barring a major crisis like 2008 or 2020, this will be the largest Treasury bond sale ever. More than $2 trillion in cash is currently sitting in the Fed's overnight facilities, which yield more than 5%. The new bill is likely to draw more money from a banking system already hit by massive outflows this year. That could lead to banks scrambling to raise more cash, driving up their funding costs and further overwhelming the system.

In a May 3 release by the Treasury Borrowing Advisory Committee, the group of primary dealers estimated that the market could absorb at least $600 billion over the next three months — but encouraged Treasury to be responsive to signs of stress in the market.