The collapses of Silvergate and Silicon Valley Bank are like icebergs calving off from the Antarctic glacier. The financial analogy to the global warming causing this collapse is the rising temperature of interest rates, which spiked last Thursday and Friday to close at 4.60 percent for the U.S. Treasury’s two-year bonds. Bank depositors meanwhile were still being paid only 0.2 percent on their deposits. That has led to a steady withdrawal of funds from banks – and a corresponding decline in commercial bank balances with the Federal Reserve.
Most media reports reflect a prayer that the bank runs will be localized, as if there is no context or environmental cause. There is general embarrassment to explain how the breakup of banks that is now gaining momentum is the result of the way that the Obama Administration bailed out the banks in 2009. Fifteen years of Quantitative Easing has re-inflated prices for packaged bank mortgages – and with them, housing prices, stock and bond prices.
The Fed’s $9 trillion of QE (not counted as part of the budget deficit) fueled an asset-price inflation that made trillions of dollars for holders of financial assets, with a generous spillover effect for the remaining members of the top Ten Percent. The cost of home ownership soared by capitalizing mortgages at falling interest rates into more highly debt-leveraged property. The U.S. economy experienced the largest bond-market boom in history as interest rates fell below 1 percent. The economy polarized between the creditor positive-net-worth class and the rest of the economy – whose analogy to environmental pollution and global warming was debt pollution.
But in serving the banks and the financial ownership class, the Fed painted itself into a corner: What would happen if and when interest rates finally rose?
In Killing the Host I wrote about what seemed obvious enough. Rising interest rates cause the prices of bonds already issued to fall – along with real estate and stock prices. That is what has been happening under the Fed’s fight against “inflation,” its euphemism for opposing rising employment and wage levels. Prices are plunging for bonds, and also for the capitalized value of packaged mortgages and other securities in which banks hold their assets on their balance sheet to back their deposits.
The result threatens to push down bank assets below their deposit liabilities, wiping out their net worth – their stockholder equity. This is what was threatened in 2008. It is what occurred in a more extreme way with S&Ls and savings banks in the 1980s, leading to their demise. These “financial intermediaries” did not create credit as commercial banks can do, but lent deposits out in the form of long-term mortgages at fixed interest rates, often for 30 years. But in the wake of the Volcker spike in interest rates that inaugurated the 1980s, the overall level of interest rates remained higher than the interest rates that S&Ls and savings banks were receiving.
Depositors began to withdraw their money to get higher returns elsewhere, because S&Ls and savings banks could not pay their depositors higher rates out of the revenue coming in from their mortgages fixed at lower rates. So even without fraud Keating-style, the mismatch between short-term liabilities and long-term interest rates ended their business plan.
The S&Ls owed money to depositors short-term, but were locked into long-term assets at falling prices. Of course, S&L mortgages were much longer-term than was the case for commercial banks. But the effect of rising interest rates has the same effect on bank assets that it has on all financial assets. Just as the QE interest-rate decline aimed to bolster the banks, its reversal today must have the opposite effect. And if banks have made bad derivatives trades, they’re in trouble.
Any bank has a problem of keeping its asset valuations higher than its deposit liabilities. When the Fed raises interest rates sharply enough to crash bond prices, the banking system’s asset structure weakens. That is the corner into which the Fed has painted the economy by QE.
The Fed recognizes this inherent problem, of course. That is why it avoided raising interest rates for so long – until the wage-earning bottom 99 Percent began to benefit by the recovery in employment. When wages began to recover, the Fed could not resist fighting the usual class war against labor. But in doing so, its policy has turned into a war against the banking system as well.
Silvergate was the first to go, but it was a special case. It had sought to ride the cryptocurrency wave by serving as a bank for various currencies. After SBF’s vast fraud was exposed, there was a run on cryptocurrencies. Investor/gamblers jumped ship. The crypto-managers had to pay by drawing down the deposits they had at Silverlake. It went under.
Silvergate’s failure destroyed the great illusion of cryptocurrency deposits. The popular impression was that crypto provided an alternative to commercial banks and “fiat currency.” But what could crypto funds invest in to back their coin purchases, if not bank deposits and government securities or private stocks and bonds? What is crypto, ultimately, if not simply a mutual fund with secrecy of ownership to protect money launderers?
Silicon Valley Bank also is in many ways a special case, given its specialized lending to IT startups. New Republic bank also has suffered a run, and it too is specialized, lending to wealthy depositors in the San Francisco and northern California area. But a bank run was being talked up last week, and financial markets were shaken up as bond prices declined when Fed Chairman Jerome Powell announced that he actually planned to raise interest rates even more than he earlier had targeted. Rising employment rates make wage earners more uppity in their demands to at least keep up with the inflation caused by the U.S. sanctions against Russian energy and food and the actions by monopolies to raise prices “to anticipate the coming inflation.” Wages have not kept pace with the resulting high inflation rates.
It looks like Silicon Valley Bank will have to liquidate its securities at a loss. Probably it will be taken over by a larger bank, but the entire financial system is being squeezed. Reuters reported on Friday that bank reserves at the Fed were plunging. That hardly is surprising, as banks are enjoying record interest rate spreads. No wonder well-to-do investors are running from the banks.
The obvious question is why the Fed doesn’t simply bail out banks in SVB’s position. The answer is that the lower prices for financial assets looks like the New Normal. For banks with negative equity, how can solvency be resolved without sharply reducing interest rates to restore the 15-year Zero Interest-Rate Policy (ZIRP)?
There is an even larger elephant in the room: derivatives. Volatility increased last Thursday and Friday. The turmoil has reached vast magnitudes beyond what characterized the 2008 crash of AIG and other speculators. Today, JP Morgan Chase and other New York banks have tens of trillions of dollar valuations of derivatives – casino bets on which way interest rates, bond prices, stock prices and other measures will change.
For every winning guess, there is a loser. When trillions of dollars are bet on, some bank trader is bound to wind up with a loss that can easily wipe out the bank’s entire net equity.
There is now a flight to “cash,” to a safe haven – something even better than cash: U.S. Treasury securities. Despite the talk of Republicans refusing to raise the debt ceiling, the Treasury can always print the money to pay its bondholders. It looks like the Treasury will become the new depository of choice for those who have the financial resources. Bank deposits will fall. And with them, bank holdings of reserves at the Fed.
So far, the stock market has resisted following the plunge in bond prices. My guess is that we will now see the Great Unwinding of the great Fictitious Capital boom of 2008-2015. So the chickens are coming hope to roost – with the “chicken” being, perhaps, the elephantine overhang of derivatives fueled by the post-2008 loosening of financial regulation and risk analysis.
First Republic and other US regional banks tumble over fears of deposit flight
Jennifer Hughes, James Fontanella-Khan, Ortenca Aliaj and Brooke Masters 7 MINUTES AGO
Biden pledges to do ‘whatever is needed’ in effort to reassure Americans their money is safe
Shares in First Republic and several other US regional banks plunged on Monday as investors worried that regulators had not done enough to stem deposit outflows following the collapse of Silicon Valley Bank.
First Republic was down by two-thirds in early afternoon trading in New York, having fallen as much as 75 per cent in the morning, while trading in its shares and those of several other US lenders were halted multiple times due to volatility.
Investors dumped the bank stocks even after the Federal Reserve and Treasury boosted lenders’ access to quick cash following the government takeovers of Silicon Valley Bank and Signature Bank.
Arizona-headquartered Western Alliance Bank was down about 60 per cent while shares of Los Angeles-based PacWest and Utah’s Zions both dropped by roughly a quarter. Of the 124 listed US banks with a market value of $5bn or less as of Friday, more than 100 were in the red.
The sell-off continued despite a pledge from President Joe Biden to do “whatever is needed” to protect bank deposits as he sought to reassure Americans their money was safe.
“We will not stop at this,” he added, referencing the US government’s actions at the weekend. “We’ll do whatever is needed on top of all [this].”
Some analysts said the sell-off was overdone given that the investor fears relate to bank liquidity, which the Fed is addressing, rather than solvency.
“There’s no question over the value of balance sheets here as there was in 2008, but I don’t know at this point what it takes to get people to look at the situation more carefully,” said Jesse Rosenthal, head of US financials at CreditSights.
On Monday, the Federal Reserve said it would lead a review of SVB’s supervision and regulation, due to be released on May 1.
“The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve,” said chair Jay Powell.
“We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience,” added vice-chair Michael Barr.
SVB was taken over by the government on Friday following a run on its deposits and a collapse in its stock price amid fears it was struggling for capital. On Sunday, regulators took over Signature Bank, which had close ties to the crypto sector.
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Monday’s sell-off was driven in part by fears that other regional banks could see a run by depositors similar to the one that brought down SVB, especially by clients with balances above the $250,000 covered by federal insurance.
“The reality is that all kinds of market participants are nervous,” said Mayra Rodriguez Valladares, a regulatory consultant. “Everyone is wondering, ‘What if I have assets at Bank A or B or C?’”
As stress rippled through the financial system, a lender to many US regional banks raced to raise tens of billions of dollars in a move to safeguard the sector.
The Federal Home Loan Banks system was finalising the sale of $88.7bn of short-term notes on Monday afternoon, signalling banks could tap the backstop for funding in the coming days, according to two people briefed on the transaction.
The sheer size of the offering would give the system, created in the midst of the Depression, the ability to lend a mammoth sum to banks attempting to fortify their balance sheets as they struggle with deposit flight.
The FHLB — seen as the lender of second-last resort before a bank might tap emergency funding from the Fed — was already a large provider of capital to Silicon Valley Bank. The Federal Home Loan Bank of San Francisco had advanced $15bn to SVB, as well as a further $14bn to First Republic at the end of last year, a filing with US securities regulators showed.
The FHLB could not be reached for comment.
First Republic on Sunday shored up its finances with funding from the Fed and JPMorgan Chase as fears of contagion spread among regional lenders. The bank said the funding gave it $70bn of unused liquidity, excluding money available from the new Bank Term Funding Program announced on Sunday.
However, the steep decline in its share price has put pressure on First Republic, which has $213bn in assets and caters to wealthy individuals.
After news of SVB’s collapse broke on Friday, the chief financial officer of one technology start-up in San Francisco told the Financial Times that he went directly to First Republic to withdraw his company’s funds.
The government was closely monitoring the situation at First Republic and was ready to intervene if the San Francisco-based financial institution came under stress in the event of a run on it, said a person with direct knowledge of the matter.
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If required, the Federal Deposit Insurance Corporation would be prepared to take over the bank, wiping out shareholders and bondholders to protect depositors as it did with SVB and Signature, said a person with first-hand knowledge of the plan being developed by US officials.
First Republic was believed to be in a better position than SVB and Signature as of late Sunday, which was why it was not taken over and included in the backstop plan for the two failed banks, said the person with direct knowledge of the matter.
Biden and Treasury secretary Janet Yellen were hoping that the actions taken to protect depositors at SVB and Signature would reassure account holders at First Republic.
People in the UK, generally, cannot use RT links, it's verboten. So, I'll help here with provision of the text : ). One misses the embedded links, but hey. Using Tor ..
Regulators shut down Signature Bank after its shares plunged in the wake of Silicon Valley Bank’s failure
New York-based Signature Bank was shut down by US regulators on Sunday, becoming the third failure in the country’s banking industry in less than a week.
According to a joint statement from the Federal Reserve, US Treasury and the Federal Deposit Insurance Corporation (FDIC), the lender “was closed by its state chartering authority.”
The statement from the regulators was issued to announce a new emergency program to protect depositors of failing banks. They explained that they would make a “systemic risk exception” for both Signature and Silicon Valley Bank (SVB), a tech and start-up focused lender that was shut down following a bank run last week, allowing the clients of both banks to have full access to their deposits.
“[SVB] depositors will have access to all of their money starting Monday, March 13… We are announcing a similar systemic risk exception for Signature Bank… all depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” the regulators said, adding that they would use the FDIC’s deposit insurance fund to fully protect all depositors, both insured and uninsured.
Signature was a big lender to the crypto industry. As of December 31, it had $110.4 billion in total assets and $88.6 billion in total deposits, according to a securities filing. New York state officials said the move to close the bank was made “in light of market events” in a bid to protect bank clients and the financial system. In the wake of SVB’s collapse last week, Signature also saw its shares plunge following deposits outflows. READ MORE: Major Silicon Valley bank implodes
The collapse of Signature is the third significant failure in the US banking industry within the past week. California-based, crypto-focused Silvergate was the first to announce its impending liquidation last Wednesday, followed by the SVB implosion on Friday – the largest US bank collapse since the financial crisis of 2008. Bank failures sparked concerns over the health of the entire US banking system, with many other lenders seeing their stocks plunge.
SVB collapse forces rethink on interest rates and hits bank stocks Two-year US Treasury bond yields record biggest one-day drop since 1987
Katie Martin and George Steer in London and Kate Duguid in New York
The failure of Silicon Valley Bank has torn into global markets, with investors ripping up their forecasts for further rises in interest rates and dumping bank stocks around the world.
Government bond prices soared on Monday, with the two-year US Treasury yield recording its biggest one-day drop since 1987, as fund managers raised bets that the Federal Reserve would act to steady the global financial system by leaving interest rates unchanged at its next scheduled monetary policy meeting this month. As recently as last week, markets were braced for another half-percentage point rise.
The two-year Treasury yield, which moves with interest rate expectations, fell by 0.59 percentage points to 4 per cent, its lowest level since September. The benchmark 10-year government bond yield slipped 0.14 percentage points to 3.54 per cent.
SVB was taken over by regulators last week after customers raced to withdraw their money in the biggest test of the US financial system since 2008. On Monday, US president Joe Biden sought to reassure Americans that their money is safe, vowing to do “whatever is needed” to protect bank deposits. The Bank of England brokered a deal to sell the UK arm of SVB to HSBC for £1.
Still, bank stocks dropped heavily as investors fretted over which other institutions might also come under strain.
In the US, shares in First Republic dropped as much as 79 per cent, and were halted 15 times in the first two-and-a-half hours of trading despite the San Francisco-based bank telling investors it had $70bn in unused liquidity. The bank ended the day down 61.8 per cent.
The KBW banks index, which includes larger US lenders, fell 11.7 per cent.
Europe’s Stoxx banks index fell 6.7 per cent, taking its decline since the middle of last week to over 11 per cent, with all 22 stocks in the index in negative territory. Several lenders suffered double-digit declines on Monday alone, including Spain’s Banco Sabadell and Germany’s Commerzbank. Austria’s Bawag Group fell 8 per cent.
The failure of SVB and closure of Signature Bank come just months after the shortlived crisis in UK government bonds, underlining the risks buried in the financial system as central banks rapidly lift borrowing costs. Investors and analysts said policymakers would need to tread carefully as they sought to hose down inflation.
“The SVB situation is a reminder that Fed hikes are having an effect, even if the economy has held up so far,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a note to clients. “Concerns over bank earnings and balance sheets also add to the negative sentiment for . . . equity markets.”
Investors believe recent developments mean the Fed will ease off its campaign to raise interest rates, after weeks of debate over whether it will opt for a 0.5 or 0.25 percentage point increase after its meeting later this month.
Refinitiv data now shows traders see a roughly even split between the odds of a quarter-point rise and the Fed leaving rates unchanged.
Goldman Sachs said on Monday that it no longer expected any increase at the Fed’s meeting ending on March 22 “in light of recent stress in the banking system”. Meanwhile, Japanese bank Nomura on Monday said that it was now expecting the Fed to cut interest rates by 0.25 percentage points at its March meeting.
The shake-up in bond markets was substantial. Germany’s interest rate-sensitive two-year bond yield plummeted to a low of 2.4 per cent on Monday, as bond markets rallied sharply in response to fading expectations of further increases in borrowing costs. The rate has fallen from the 14-year high of 3.3 per cent it hit last week, showing how sharply investors have repriced their rate expectations since SVB’s collapse.
Greg Peters, co-chief investment officer at PGIM Fixed Income, said he believed the rally in government bonds was misplaced. “It’s way too big of a move. The markets are overreacting massively; they completely forgot about inflation,” he said. “This is a massive head fake.”
But some investors and analysts, including George Saravelos, a strategist at Deutsche Bank, said the SVB rescue package from the Fed, which includes an offer to absorb government debt and mortgage-backed bonds at above-market prices, represented a new form of quantitative easing — the waves of bond-buying used by policymakers to stabilise the financial system over the past decade and a half.
“Both the speed and end point of the Fed hiking cycle should come down,” Saravelos said, adding that tightening would now be “amplified due to stress in the US banking system”.
Michael Every, an analyst at Rabobank, said the implications of the Fed’s “bailout of Silicon Valley venture capitalists funding Instagram filters that make cats look like dogs” were potentially “enormous”.
“The Fed is de facto allowing a massive easing of financial conditions as well as soaring moral hazard,” he said in a note to clients.
Currencies that perform well in times of stress also rallied. The Japanese yen and the Swiss franc both climbed more than 1 per cent against the dollar.
The rapid collapse of SVB made market participants “more aware again that the Fed will eventually break something if it keeps raising rates”, said Lee Hardman, currency analyst at MUFG.
The bank’s collapse had also “taken the wind out the US dollar’s sails” by highlighting risks associated with rising rates, Hardman added. A measure of the dollar’s strength against a basket of six international peers fell 0.6 per cent on Monday.
on March 13, 2023, 8:00 pm