Another trenchant analysis in real time by Alasdair Macleod. From Macleod at goldmoney.com:
We are all now aware that the global banking system is extremely fragile. Driving bank failures is contracting credit, which in turn drives interest rates higher. Though it is not generally appreciated, central banks have failed to suppress them.
Some regional banks have failed in the US and the run on Credit Suisse’s deposits has forced the Swiss authorities into forcing a reluctant rescue by UBS. Undoubtedly, as the great credit unwind plays out, there will be more rescues to come.
In this, the earliest stages of a banking crisis, some questions are being answered. We can probably rule out bail-ins in favour of bail outs, and we can assume that nearly all banks will be rescued — they must be in order to prevent systemic contagion.
In this article I quantify the position of the global systemically important banks (the G-SIBs) and point out that the central banks which are meant to backstop them are themselves bankrupt — or rather they would be properly accounted for.
Because even a minor failure in the banking system could undermine the entire global banking system, the much heralded pivot is now here, but not in plain sight. Because central banks have lost control over interest rates, the focus on preserving the financial markets underpinning the banking system has shifted to supressing bond yields. This is why the Fed has introduced its Bank Term Funding Programme, likely to be copied in other jurisdictions.
It is Powell’s hidden pivot — his line in the sand. But it is the last desperate throw of the dice and depends entirely on inflation being transient and interest rates not rising much more.
The price of even a successful preservation of the banking system is the destruction of fiat currencies, because the bigger picture is still of the greatest credit bubble in history unwinding. And that process has only recently started.
Now that everyone in finance knows that there is a banking crisis, cynicism prevails. When a central banker or treasury minister tries to reassure the public, it is disbelieved. The risk to an extremely fragile global banking system is that if disbelief in public statements spreads from financial sceptics to the wider public, the system is doomed. All credit is based on confidence and confidence alone.
Posted in Banking, Collapse, Currencies, Debt, Economics, Economy, Government
Tagged Banking crises, Jerome Powell
It’s not looking too good. From Satyajit Das at newindianexpress.com:
If everything is fine, then why have US banks borrowed $153 billion at a punitive 4.75% against collateral at the discount window, a larger amount than in 2008/9?
Financial crashes like revolutions are impossible until they are inevitable. They typically proceed in stages. Since central banks began to increase interest rates in response to rising inflation, financial markets have been under pressure.
In 2022, there was the crypto meltdown (approximately $2 trillion of losses).
The S&P500 index fell about 20 percent. The largest US technology companies, which include Apple, Microsoft, Alphabet and Amazon, lost around $4.6 trillion in market value The September 2022 UK gilt crisis may have cost $500 billion. 30 percent of emerging market countries and 60 percent of low-income nations face a debt crisis. The problems have now reached the financial system, with US, European and Japanese banks losing around $460 billion in market value in March 2023.
While it is too early to say whether a full-fledged financial crisis is imminent, the trajectory is unpromising.
***
The affected US regional banks had specific failings. The collapse of Silicon Valley Bank (“SVB”) highlighted the interest rate risk of financing holdings of long-term fixed-rate securities with short-term deposits. SVB and First Republic Bank (“FRB”) also illustrate the problem of the $250,000 limit on Federal Deposit Insurance Corporation (“FDIC”) coverage. Over 90 percent of failed SVB and Signature Bank as well as two-thirds of FRB deposits were uninsured, creating a predisposition to a liquidity run in periods of financial uncertainty.
Posted in Banking, Business, Currencies, Debt, Economics, Economy, Governments
Tagged Banking crises
The math behind deposit insurance is dividing a large number (deposit liabilities) by a small number (insurance fund). From Tyler Durden at zerohedge.com:
As Simon White writes today, “a full guarantee of all bank deposits would spell the end of moral hazard disciplining banks and mark the final chapter of the dollar’s multi-decade debasement.” And yet that’s where we are headed, even if with a few hiccups along the way, because as White also notes, with the latest banking crisis in the US, it’s the clean-up that could end up doing far more lasting damage. That’s because with the failure of SVB et al prompted the FDIC to guarantee that all depositors will be made whole, whether insured or not
And so, the precedent is being set, with Treasury Secretary Janet Yellen commenting on Tuesday that the US could repeat its actions if other banks became imperiled. She was referring to smaller lenders, and denied the next day that insurance would be “blanket”, but given the regulatory direction of travel over the last forty years, this will inevitability apply to any lender when push comes to shove.
Realizing it’s just a matter of time before the next systemic crisis tips the banking sector over, over the weekend, a coalition of midsize US banks asked federal regulators to extend FDIC deposit insurance for the next two years, so as to alleviate any fears which could result in a wider deposit run on regional and community banks.
But what would deposit insurance of all $18 trillion US deposits – not just the $11 or so trillion in deposits that are currently “insured” by the FDIC – look like? As BofA’s rates strategist Mark Cabana writes, deposit insurance has been a very effective solution to stabilize deposit outflows historically. Deposit insurance can be done in a variety of ways: (1) all domestic bank deposits; (2) increase coverage to a higher amount vs. the $250k currently.
First came Covid, then came monetary inflation, then came higher interest rates, and then came a financial crash. From Christian Parenti at thegrayzone.com:
On Friday March 10th, 2023, Silicon Valley Bank (SVB) died of Covid. Alright, it’s a little more complicated than that, but Covid lockdowns followed by massive government stimulus were a critical – and massively under-acknowledged – factor in propelling the bank’s demise.
At the heart of the crisis is the gigantic pile of low-interest debt that was issued during the height of the pandemic. While private-sector pandemic-era debt like corporate bonds also soared, US government debt like Treasury bonds piled up.
In a nutshell, during the pandemic the government issued enormous amounts of extremely low interest government debt — about $4.2 trillion of it. But now interest rates, including on government debt, are higher than they have been in 15 years and investors are dumping their old low-interest debt. As they dump, the resale price of the old debt goes down. The more it declines, the more investors want to dump. And thus, a panic is born.
To understand the problem fully, the question of US government debt has to be put into its larger context, which is: the pandemic response as a whole.
When news of the Covid virus first broke in December 2019, the 2 Year Treasury bond was being offered at 1.64% interest; the 10 year was at about 1.80%, and the resale value of such bonds on secondary markets was strong. Then, in March 2020, as Covid cases and deaths spiked, the US began to shutter its economy with panicked lockdowns that were supposed to “flatten the curve” or slow the spread of the virus and thus protect the hospitals. But Covid was politicized and the lockdowns were extended.
The Fed can continue tightening or it can protect banks, but it can’t do both. From Ryan McMaken at mises.org:
The Federal Reserve’s Federal Open Market Committee (FOMC) on Wednesday raised the target policy interest rate (the federal funds rate) to 5.00 percent, an increase of 25 basis points. With this latest increase, the target has increased 4.75 percent since February 2022.
However, with an increase of only 25 basis points, the March meeting is the second month in a row during which the Fed has pulled back from its more substantial rate hikes of 2022. After four 75-basis-point increases in 2022, the committee approved a 50-point increase in December, followed by a 25-point increase in February, and another on Wednesday.
Although CPI inflation remains at or above six percent, the FOMC has slowed down in its monetary tightening over the past two months. At Wednesday’s press conference, Fed chairman Jerome Powell moved further into dovish territory.
We should expect more of this as the year wears on. Although CPI inflation remains well above the Fed’s two-percent target, recent bank failures will put the Fed under pressure to force interest rates back down so as to give banks better access to cheap liquidity. In other words, the Fed will have to choose between helping bankers on the one hand and reducing inflation—both monetary and CPI—for regular people on the other. Experience suggests the Fed will side with bankers and will thus move back in the direction of easy money even as price inflation continues to drive up the cost of living.
A contrary prediction from Tom Luongo: the Fed will keep raising rates. From Luongo at tomluongo.me:
So, Credit Suisse is no more. Good riddance? I think this is an open question given the very complicated landscape of the global banking system today. By the time I’m done here I think you’ll have an answer that no one, including me, was expecting.
There’s a lot to cover, so let’s start at the beginning.
In the wake of the “three-fer” take out of Silvergate, Silicon Valley and Signature banks by the ‘market’ I think we have a pretty clear picture of what’s really going on.
This wasn’t a ‘market’ operation. It was a Fed/NY Boys operation and a very successful one.
The Fed (and only the Fed through its proxies) had the motive, means and opportunity to perform the hit job. I wrote a big post for my patrons on March 11th (now made public) going over this.
These Three S’s were all operating as offshore Shadow banks. As Phil Gibson pointed out on his most recent Substack article:
SVB ultimately runs its funding the way Startup funding does:
- A person with $1b comes in and puts $1b into SVB. They go out to a startup and sign a term sheet. This sheet says that the startup will deposit its money in SVB.
- Then SVB goes out and loans that $1b out to another VC. Who ‘invests’ it in another startup, who’s term sheet says they will keep their deposits in SVB.
- So now SVB has take $1b dollars and made it $2b dollars. Without any fed regulation or intervention.
To which I would add the deposits coming back in were then invested in long-dated US Treasuries and marked as ‘hold to maturity.’ This meant they couldn’t be sold. This was a good deal as long as the short-end of the yield curve stayed at the zero-bound, or at least below that of the long-end.
“Double, double, toil and trouble, Fire burn and cauldron bubble.” That’s what Shakespeare had to say about the banking crises. From Bill Bonner at bonnerprivateresearch.substack.com:
(Source: Getty Images)
“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”
~ Janet Yellen, June 20, 2017
According to a recent study, the US banking system – heavily regulated by Janet Yellen, her forerunners and successors – faces huge losses.
We are not experts in banking, but we think we understand the basic model. Banks take in cash from depositors and ‘lend’ it out or ‘invest’ it. The depositors can ask for their money back at any time. But the loans and investments only come back when they are ready. Between the two time periods, long and short, the banks can get squeezed…if depositors suddenly want their money back. Central banks were set up to prevent it. In a crisis, they provide solvent banks with liquidity.
But what if the banks aren’t solvent? What if their ‘assets’ – loans and investments – go down? What if they loaned out money at 3% interest…and then interest rates go up to 5%? What if their investments – say in Amazon or Rivian – lose so much money that they can never give depositors back their money?
Here’s the money line from academic researchers Erica Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru:
The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets.
The net worth (book value) of the entire US banking industry is only $2.1 trillion. Which means, the whole banking system is already nearly insolvent. Busted. Broke. You can imagine what would happen if stocks went down another 10%…20%….or 40%. There would be Hell to pay.
No one would suggest subsidizing plumbers who install leaky pipes, nor providing grants for restaurants that make customers sick…but those groups don’t have lobbyists!
Posted in Banking, Debt, Economics, Economy, Financial markets, Government
Tagged Banking system
SLL has published many articles on Central Bank Digital Currencies and will continue to do so. It’s important to realize if they can get away with this, they’ve got us all by our gonads. From Jordan Schachtel at dossier.substack.com:
The ruling class may pursue a Hail Mary pass to restore their control over the system.
The American financial system is threatening to come apart at the seams, and for the people who control the levers of power, the only way to patch things up may involve the installation of a monetary Social Credit Score system. In recent years, America’s fiat fractional reserve system has transformed into a faith-based credit system, and the people who use the dollar are losing confidence in a system that relies entirely upon their complete and total trust. Should our collective faith in the system continue to decline, the American ruling class will decide that their path forward involves regrasping full control of their confidence scheme through the implementation of a Central Bank Digital Currency (CBDC).
A U.S. CBDC would do much more than simply implement a fully digital version of the U.S. dollar. This system could provide authorities with an almost unlimited digital toolkit to both surveil and censor citizens. A CBDC is advertised as making the system more “efficient” and helping to deliver monetary power to the unbanked. However, it would also give shadowy bureaucrats the power to swipe a “criminal’s” life savings, instantly distribute funds to allies of the system, among an almost infinite series of additional authoritarian instruments.
Over previous decades, when the United States stood tall as the world’s lone financial hegemon, there was never much of a reason to implement a dollar-based CBDC. After all, our political and financial elites had no reason to do so. There were no competing peers and zero superior monetary systems in sight (prior to the discovery of Bitcoin). These forces had full control over a system that empowered them with incredible prestige and power, and there was no reason to antagonize the billions of people who were somewhat contently operating within the confines of the system.
They call it moral hazard because it’s a moral issue. The people responsible should have to pay when things go wrong, not the taxpayers. From David Stockman at lewrockwell.com:
Janet Yellen is one continuous anti-prosperity horror show and the reason is obvious enough. She got her indoctrination at Yale from the granddaddy of Professor Keynes’ US disciples, James Tobin, in the late 1960s and has spent most of her years since then pontificating in academia or dictating from the Fed.
So now with the arrival of screaming evidence that the banking system desperately needs the disciplining effect of depositor flight, she comes out four-square for euthanizing the $9 trillion of still uninsured deposits in the US banking system.
But let’s cut to the chase. Banks not disciplined by their depositors and not at risk for deposit flight are dangerous institutions. They leave bank executives free to swing for the fences on the asset-side of their balance sheets without fear that attentive depositors will move their money to safer pastures.
For crying out loud. It was bad enough during the last several years when deposits were dirt cheap and knuckleheads like those who ran SVB decided to load up their balance sheets with 10-30 year duration assets against overnight demand deposits, most of which were uninsured.
For the moment that allowed them to book outsized profits and reap the consequent benefit of soaring stock options, but these “profits” were phony as a two-dollar bill. That’s because they were being generated off long-term fixed income assets, the prices of which had nowhere to go except down.
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STRAIGHT LINE LOGIC 