Daily Deposit 3.22.2023

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Today in Banking

Lessons from Credit Suisse

House Financial Services Committee asks for “a comprehensive timeline of events related to the Federal Reserve’s lending, supervisory and examination activity.

SVB Fallout & the shaky banking industry foundation

Federal Reserve expected to raise interest rates by another 25 bps

Community bank depositors could be protected if run occurs - Yellen

Banking 101

Are we on the verge of a major financial crisis?

Are banks insolvent? Some are convinced and willing to put their money where their mouth is.

To understand where we are today, we need to go back to 2020. I don't know about you, but I was living my best life. Grinding away business as usual. The came COVID, and with it came the lockdowns. Fun was over and we were all shut in at home hoping to "flatten the curve". If we were throwing fastballs in Jan 2020, then by spring of 2020 we were throwing an eephus. The velocity of money went down big time.

During a crisis, people want safety. Financially, that meant higher savings ~16% (2% today) and putting away money in safer longer term positions. 10-year treasury bonds anyone? The only thing this seemed to cause was a liquidity crisis. A lot of investors tied up funds in the low interest rate environment, affecting liquidity… cough… SVB… cough…

Interest rates dropped to 0% which encouraged us all to borrow more money to buy houses, cars, businesses, etc. The dollar is strong like bull during this period. Mix that in with trillions of stimmie checks, and the economy is cruising! But where does all the money end up? The banks baby. Eventually, whether we were saving, spending, or borrowing, it all came back to the banks.

Now this is where we see the deposit growth. SVB is perfect example, their deposits triple to ~$200B during this boom. But banks can't buy short-term debt because there's no money in it at 0% rates. Instead they go the super conservative 10-year bond route. A perfectly fine move to make if the economic environment didn’t change. But it did.

What actually happens is inflation explodes on to the scene with the highest inflation in the last 40 years. It peaks just over 9% and the Fed steps in to bring that down. Cause guess who hurts during inflation? It's not the rich folk with assets that grow through inflation, it's the poor little guys that are forced spend more and more on the same goods and services.

Now how might the Fed control inflationary pressure? By jacking up interest rates! Remember those low interest rate 10-year bonds? Well they're not worth much when interest rates go from 0% to 4.5%. So much for kush government-backed securities… Now banks are carrying paper losses with a liquidity problem, and this forces them to sell those assets off balance sheet. This tightens financial conditions making it even harder to borrow money.

This leaves SVB holding the bag as the Central Bank goes from $900B to $1T. Remember, the money has to go somewhere. Banks in the US have the luxury of special accounting treatment, which lets them hold-to-maturity. This means they're guaranteed the value at which they bought the bonds. The only time this doesn't work is when all of the depositors want their money at once.

Now what?

When the government steps in to protect depositors, that's going to cause an inflationary pressure. The more this pressure builds, consumers may start to question if the dollar is worth what they thought it was. Maybe they think they'll look for an alternative. When these 2 things happen, hyperinflation can occur, but that's not 100% guaranteed.

No one was worried about this even 2 months ago. What we don't know is what happens if the US dollar experiences hyperinflation? What's the result of hyperinflation of the Global Reserve Currency?

I'm not trying to spread FUD, but we know the FDIC is estimating American banks have $620B in unrealized losses on their balance sheets. Many of these stem from the same long term bonds SVB bought. 190 banks are in danger of failure even if half their uninsured depositors withdraw their funds. 

Stay cashy banksters!

LULZ

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