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Banks on the Brink: 2023 Mini-Crisis


Paxter
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12 minutes ago, Chataya de Fleury said:

I seem to remember that you’re a teacher - please forgive me if I’m wrong.

Retired semiconductor exec, although I started off my career in the Big 6.  My wife is the schoolteacher - good memory!

Edited by Wilbur
It wasn't eight anymore, down to six
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So......

a study has identified (so far) nearly 200 additional banks also in danger of not being liquid enough to cover major withdrawals without resorting to the same fatal losses that sank Silicon Valley Bank, namely these excess allocations to the long dated low yield treasuries that are "unrealized" balance sheet losses.

That is unrealized till the moment depositors come calling for thier cash and the losses trigger.
 
" Nearly 200 banks at risk for same fate as SVB: study"
 
https://nypost.com/2023/03/18/nearly-200-banks-could-fail-the-same-way-svb-did-study?utm_source=drive&utm_campaign=android_nyp
 

Edited by DireWolfSpirit
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1 hour ago, Chataya de Fleury said:

This is now completely moot since the Fed is buying all of these at par.

The bank equity valuations are still going down and likely to decline further.

The majority of 401K and pension funds are holders of that bank equity through stocks and mutual funds as you know.

So no not completely moot, there are, and will be, ramifications even though the Fed has said they will guarantee uninsured deposits (SVB's) and make emergency capital (the backstop) available to banks.

Also has the Fed agreed to guarantee future uninsured deposits, or just SVB's uninsured depositors?

I wasnt certain they agreed to guarantee all future uninsured (those above that 250k threshold) at all the other institutions?

Ive heard comments that the Fed promise falls short of that sort of blanket protection?

Edited by DireWolfSpirit
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8 hours ago, Iskaral Pust said:

“Usually” this amount of monetary tightening by central banks would be enough to cause a recession, although there is a lag to those effects.  We’ve seen the slowdown already in the most interest rate-sensitive sectors, e.g. housing/construction and speculative start-ups, but it hasn’t percolated yet into the rest of the economy.  

Housing starts grew by 13.8% in February. Maybe it's a one-month fluke, but it's not what I'd expected to see if interest rates were closing off demand or if a recession was imminent. 

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7 minutes ago, Chataya de Fleury said:

I the current crisis, it’s pretty much all. They haven’t said it, but since they also guaranteed Signature…yup, right now, any and all.

I could foresee lawsuits from other banks and stakeholders if they did not guarantee the others. But yeah, I dont think its been explicity stated yet, Im sure the hope is we dont have to go there.

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3 hours ago, DireWolfSpirit said:

So......

a study has identified (so far) nearly 200 additional banks also in danger of not being liquid enough to cover major withdrawals without resorting to the same fatal losses that sank Silicon Valley Bank, namely these excess allocations to the long dated low yield treasuries that are "unrealized" balance sheet losses.

That is unrealized till the moment depositors come calling for thier cash and the losses trigger.
 
" Nearly 200 banks at risk for same fate as SVB: study"
 
https://nypost.com/2023/03/18/nearly-200-banks-could-fail-the-same-way-svb-did-study?utm_source=drive&utm_campaign=android_nyp
 

Um, isn't that always the problem with banks? If there is a run, then even solvent banks will face a crisis, which has a snowballing effect. 

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21 minutes ago, ants said:

Um, isn't that always the problem with banks? If there is a run, then even solvent banks will face a crisis, which has a snowballing effect. 

Nailed it.

No modern-day bank can survive extreme deposit outflows. See: fractional reserve banking.

Edited by Paxter
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12 hours ago, Paxter said:

The good thing is that FR is nowhere near as systemic as Lehman.

The big worry this weekend is Credit Suisse and whether a peaceful resolution can be effected. All eyes on Europe and any ripple effects to other systemic banks there. 

Yes, First Republic is small fry. Credit Suisse is a bigger problem, though it does have a few options and it looks like UBS will take it with some encouragement from Swiss authorities, and probably break a few pieces off for other private equity to snap up.

My point with Bear Stearns and Lehmann being 6 months apart is...from what I can recall of the GFC, at the time people thought Bear had been sorted with the sale to JP Morgan, and while Bear was a shock, it wasn't nearly as big a deal as Lehmann. 

It's not usually the big ones that fall first, the cracks appear in smaller places and then eventually catch up to something big. Even if they're papered over for now, I think there's big trouble lurking somewhere and I'm not trusting any bounce that might come from equity markets in the next few months.

These financial crises might seem to happen much more quickly in the Twitter age, but in the fullness of time they still take months to play out and usually ensnare a lot of different companies - unfortunately I think we've only seen the early skirmishes.

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39 minutes ago, ThinkerX said:

Nah. Bipartisan vote done behind closed doors late at night with no press whatsoever.

I would like to draw attention to the disparity in response to the -preventable- derailment of a train spewing toxins (actually threatening lives/livelihoods/homes) and some Accounting Pirates tasting nature for the first time in their cushy fucking lives 

And I'm so over hearing about how "this isn't a bailout" already 

Last time I looked the FDIC insured up to a quarter-million... but I guess that's only for the non-millionaires right? 

Great to know

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Looks like Swiss authorities will force through the UBS takeover of CS. Probably a good outcome for financial stability. Will need to look at the details to see what this means for banking competition, and the size and prospects of the new UBS.

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17 hours ago, Secretary of Eumenes said:

I would like to draw attention to the disparity in response to the -preventable- derailment of a train spewing toxins (actually threatening lives/livelihoods/homes) and some Accounting Pirates tasting nature for the first time in their cushy fucking lives

Why is it the professional money people in all the sectors who are tell us financially stupid people what is what with money, investment, futures, etc., why are They the first people who lose their shirts when the financial sector blow out its shyte?  Why do we listen to them at all? (I don't, but then what does a humanist know, ya know?)

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A few points about the UBS takeover:

  • The Swiss taxpayer is backing the sale. The government is guaranteeing losses incurred by UBS up to 9bn SF. Plus the central bank is providing a 100bn liquidity line (hopefully this is not needed). 
  • Apparently 16bn SF worth of bonds will be "bailed in" as part of the sale. This is a post-2008 innovation that allows creditors to bear some losses without going into liquidation. So at least some elements of the post-crisis framework seem to be working, though some will be howling that a portion of debtholders are losing out more than shareholders.
  • UBS will probably be the fifth-largest bank in Europe by the end of this (by asset size). It's currently around 12th. 
Edited by Paxter
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This doesn't sound good:

Quote

On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found.

That is because the Federal Reserve’s aggressive interest rate hikes to tamp down inflation have eroded the value of bank assets such as government bonds and mortgage-backed securities.

“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” economists wrote in a recent paper published on the Social Science Research Network.

https://www.usatoday.com/story/money/personalfinance/real-estate/2023/03/19/svb-collapse-new-banks-could-fail/11504269002/

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1 hour ago, Tywin et al. said:

If banks allocated a lot of funding into cash or cash equivalents, they wouldn’t be doing a great job of fulfilling their financial intermediation purpose. Obviously there is a trade off with liquidity if you aren’t sufficiently in cash or have access to funding lines, and regulators didn’t get it right for SVB. But the above study is hardly surprising.

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Yeah it's a good point @Chataya de Fleury.

Some of the causes of this (and previous) crises are inherent in the way we structure modern financial services and are within our risk tolerance provided they are managed appropriately e.g.:

  • Fractional reserve banking (and the risk of bank runs)
  • Securitization of mortgages
  • Banks (and other market participants) being susceptible to swings in market prices (including the interest rate)

Other causes of this mess are bugs and things we shouldn't tolerate e.g.:

  • Allowing banks like SVB and FR to run business models funded by a ton of uninsured deposits with inadequate liquidity coverage
  • Large losses to crypto exposures (Silvergate; Signature)
  • Inadequate controls; high management turnover; financial reporting irregularities (Credit Suisse)
Edited by Paxter
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