Biden's Bank Blunders

Could be worse. Barely.

oliver clotheshoffe wrote:

These bank failures are making me nervous. I just checked my account balance and it said $LMA0.00

Multi-billion dollar rescue deal for First Republic bank
Bigger banks are injecting funds into First Republic in a bid to shore up confidence in the banking system
By Natalie Sherman, Business reporter, New York | BBC
Published5 hours ago

A group of big US banks has injected $30bn (£24.8bn) into a smaller regional bank, First Republic, which had been seen as at risk of failure.

The move came as authorities in the US are trying to quell panic over the health of the banking system, after a series of bank collapses in the US.

Worries about the sector have spread globally, raising fears of a crisis.

US regulators called the move "most welcome", while the banks said their action reflected their "confidence".

They said the banking system had plenty of cash and made big profits.

"Recent events did nothing to change this," they said. "The actions of America's largest banks reflect their confidence in the country's banking system."

Reports of plans for the aid from the 11 banks, led by JP Morgan and Citigroup, helped lift financial markets and sent shares in First Republic surging more than 20% at one point, triggering trading halts.

But a sell-off started again in after-hours trade in a sign that concerns remain.

The San Francisco-based firm had seen its share price plunge nearly 70% over the last week, as investors worried it was the next bank at risk of a rush of customers withdrawing their deposits.

"This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system," US financial officials said.

'Risk of contagion'
Problems in the banking sector surfaced in the US last week when Silicon Valley Bank (SVB), the country's 16th-largest lender, collapsed in the biggest failure of a US bank since 2008.

That was followed two days later by the failure of New York's Signature Bank.

Authorities stepped in to guarantee deposits beyond typical limits in an effort to head off further runs on bank deposits, but financial markets have remained jumpy.

In a sign of strains in the system, the US central bank reported a surge in emergency lending to banks, with $318bn in outstanding loans as of Wednesday, up from $15bn a week earlier.

That included roughly $12bn offered through a fund created after the SVB collapse.

"The size of the spike in the Fed's emergency lending underlines that this is a very serious crisis in the banking system that will have significant knock-on effects on the real economy," Paul Ashworth, chief North America economist at Capital Economics said.

In an appearance before politicians in Washington, US Treasury Secretary Janet Yellen said that depositors should have confidence in the system, while acknowledging the severity of the episode.

"We felt that there was serious risk of contagion that could have brought down and triggered runs on many banks and that's something, given that our judgement is that the banking system overall is safe and sound," she said.

Meanwhile, the vice president of the European Central Bank (ECB), Luis de Guindos, said the banking industry in Europe was "resilient" and firms there had "limited exposure to the institutions of the US".

He spoke as the ECB announced a further increase to interest rates from 2.5% to 3%, sticking to its plan for a rise despite concerns about how the move might affect the market turmoil.

Help for banks
Central banks around the world have sharply raised borrowing costs over the last year to try to curb the pace of overall price rises, or inflation.

The moves have hurt the values of the large portfolios of bonds bought by banks when rates were lower, a change that contributed to the collapse of Silicon Valley Bank, and has raised questions about the situation at other firms.

The Swiss National Bank on Wednesday said it was extending up to £44bn in emergency funds to troubled lending giant Credit Suisse, which was seen as vulnerable in the wake of the US bank failures.

Its shares bounced back more than 15% after big falls a day earlier, while major indexes across Europe also gained.

Sir John Gieve, former deputy governor at the Bank of England, told the BBC that central banks were sending a "message" that such problems would be contained locally.

He added that in Credit Suisse's case, the Swiss National Bank's action was likely to be enough to stop the crisis spreading.

"What we've seen overnight is the Swiss central bank saying 'no, we will not let this get into a disorderly collapse'," he said.

"I don't know what the future for Credit Suisse holds but so far they are still standing and it looks like the Swiss central bank will ensure it's standing long enough to rearrange its affairs for the future."

Credit Suisse, founded in 1856, has faced a string of scandals in recent years, including money laundering charges, spying allegations and high profile departures.

It lost money in 2021 and again in 2022 and has warned it does not expect to be profitable until next year. Customers pulled millions of dollars from the firm in recent months.

White House spokesperson Karine Jean-Pierre said officials had been monitoring the developments at Credit Suisse but its troubles were "distinct" from events in the US.

"Its problems are not related to the current economic situation," she said.

10 charts that explain the current banking crisis
Friday, Mar 17

The understanding of what just happened — or is happening — to the U.S. banking system will take years to untangle. After all, we are still talking about 2008.

On Thursday, the latest shoe dropped when a consortium of 11 U.S. banks injected $30 billion into troubled bank First Republic (FRC), stabilizing the company at a time when it appeared to teeter on the verge of becoming the fourth U.S. bank to fail in the last two weeks.

But over the last few weeks, a clearer narrative has begun to come together on what has happened so far in this crisis.

A narrative that we think can be told through the following charts, which illustrate much of the path the economy has traveled since the pandemic.

Let’s get into it.

Our first chart shows inflation. You already know it’s high and that it is the Federal Reserve's responsibility to reel it in to a manageable 2% per year.



The Fed's blunt instrument to accomplish this is raising interest rates.

So that's what Chair Jerome Powell and the other central bankers have done: raised rates.

Again and again.




All of a sudden, the financial decisions that seemed great and made lots of money when rates were low became major liabilities when rates began rising.

These rising rates will soak anything built in the interest-rate flood plane, like industries that relied cheap capital to get ahead (or even exist) like tech.

This is why Meta (META) and other tech companies are laying off so many people and talking about "efficiency" so much instead of "growth."

And Silicon Valley Bank found itself with a lot of these tech clients that were paring back.

After seeing deposits boom in 2021 and 2022, the bank was caught off guard in February when its tech clientele stopped depositing big wads of cash in the bank.



The company had also purchased tons of long-term bonds when rates were low. Now with rates much higher, those Treasuries were suddenly worth a lot less. When interest rates and yields go up, bond prices go down.



The losses Silicon Valley Bank took on its bond portfolio, along with the deposit outflows, were like two big holes in the side of the ship. As a result, the bank's credit rating was slashed.

Because the bank was focused on institutions, like startups and tech companies, it was more prone to a bank run as companies usually have a lot of uninsured deposits, i.e. any amount over the FDIC's insurance limit of $250,000.

Companies indeed got nervous and took their cash out, which tanked the stock as word got around.

A week ago, the bank failed and went into receivership with the FDIC in charge.



Not everyone got their cash out, but the FDIC said it would protect all depositors. Here's who was most exposed.



After the failure of Silicon Valley Bank — and crypto-focused Silvergate on March 8 — investors grew concerned about smaller regional banks, or other banks with a more niche clientele.

One bank, Signature, a New York regional bank, was seized by regulators on Sunday.

Like Silvergate, Signature it was a real estate-focused bank that had gotten into crypto and with deposits down 17% in Q4 had a weak balance sheet.



Silicon Valley Bank and Signature are the second- and third-largest bank failures ever.



However, many are eager to point out that they're small and niche.

Large bank stocks are faring a little better and the regional bank stocks, as we can see in the chart below which compared the KRE ETF that tracks regional to the KBE ETF that tracks larger banks.



Here's SVB and First Republic compared to the big banks.

First Republic, which had taken the biggest hit in the market, was saved Thursday when an Avengers-esque line up of 11 banks including A-listers JPMorgan, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley deposited $30 billion to right the ship.



As we head into the second weekend of this crisis, we don't yet know where this ends or what other banks might face a similar fate.

But the dynamics that caused this collapse — rising rates to crush inflation — may expose other structures that were not built with adequate protections over the last few decades, something BlackRock's Larry Fink is worried about.

On the other hand, the drama in the markets that this banking industry mess has created has reduced the likelihood of further rate hikes, which were very much expected. Perhaps a roundabout way for stock investors to calm their nerves.

As Apollo's Torsten Sløk wrote in a note on Wednesday: "With the regional banks playing a key role in US credit extension, the Fed will not raise interest rates next week, and we have likely seen the peak in both short and long rates during this cycle."

________________

Markets

Close to 190 banks could face Silicon Valley Bank's fate, according to a new study
USA TODAY
SWAPNA VENUGOPAL RAMASWAMY
Updated March 20, 2023, 7:13 AM

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.

A run on these banks could pose potential risk to even insured depositors — those with $250,000 or less in the bank — as the FDIC’s deposit insurance fund starts incurring losses, the economists wrote.

Of course, this scenario will only play out of if the government does nothing.

“So, our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.

How did Silicon Valley Bank collapse?
In the case of the Santa Clara-based Silicon Valley Bank, which held most of its assets in U.S. government bonds, the market value of its bonds went down when interest rates started going up.

That’s because most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond.

However, when interest rates rise, the lower fixed interest rate paid by a bond is no longer attractive to investors.

The timing coincided with the financial difficulties many of the banks’ customers – largely tech start-ups – were dealing with, forcing them to withdraw their deposits.

In addition, Silicon Valley Bank had a disproportional share of uninsured funding, with only 1% of banks having higher uninsured leverage, the paper notes. "Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run."

elsewhere, Iben wrote:

https://www.semafor.com/article/03/31/2023/us-regional-banks-stuffed-underwater-bonds-in-a-sock-drawer

When a bank makes a loan, accountants assign it one of two labels. “Held to maturity” loans don’t have to be valued daily, since the bank isn’t planning to sell them. But “available for sale” loans do, and their gains and losses have to be disclosed.

American banks sold or reclassified almost $700 billion worth of securities last year, avoiding billions of dollars of paper losses.

SVB shifted $8.8 billion, or about a third of its available-for-sale portfolio, into held-to-maturity status last year, filings show. PNC Bank reclassified $82.7 billion in mostly Treasury bonds and mortgage bonds, which saved it from having to recognize $5 billion in paper losses.