What are the ramifications of the events that shook the US financial system last week and spooked Fed and Treasury enough to compel the nation’s top officials to institute an emergency rescue plan aimed at averting bank runs? And what are the implications of that rescue plan?
It’s impossible to answer those questions. Or, impossible to answer them in full, today. Only time will tell whether the SVB meltdown was the punctuation mark on the most aggressive Fed tightening cycle in a generation, or a kind of August 9, 2007, BNP Paribas moment. And only time will tell whether the rescue plan, as conceived and implemented, will be remembered as “decisive and necessary” or an egregious “own goal,” so to speak.
Of course, we’re all compelled to ponder those questions now, and offer up opinions on what the answers will ultimately be. Some of us will be right, others wrong. I try to keep my editorializing open-ended enough such that I can be “right” no matter what happens.
On Monday, Nomura’s Charlie McElligott weighed in with some thoughts on the situation. Below, find a very brief excerpt which captures his thinking on some of the more generalized issues.
Taking it back to a question I was asking myself last night: What do Sunday’s actions (at the core, that the Fed absorbs banks’ unrealized losses on HTM portfolios by instead accepting HQLA as collateral at par value for an “advance” with a term up to one year in order to cover deposits) do to change the fact that depositors everywhere are now even more aware that instead of sitting in bank savings account at 0.0%, they should continue reallocating instead into money market funds and earning ~4.5%?
After the exposure to this story, aren’t small businesses and ma & pa even more likely to question their money being anywhere but either at 1) a mega SIFI or 2) collecting interest in a money fund, after this existential crisis / regional bank stigma?
Hence, “deposit flight” does not just go away from here, as it’s not solved from an “incentives to stick-around” perspective.
Any “depositors” still “sitting in bank savings account at 0.0%” deserve their losses. Do you think any of these mythical creatures still exist? Why SVB didn’t create a short term treasury ladder a year ago is a mystery to me.
It needs to be stressed that incompetence and lack of supervision are part of the story. Also, ignorance in the US senate and house play a role….Does anyone remember the discussion about not letting rescued banks lobby after 2008-2009? Or look at Boeing being allowed to set their own safety standards and compliance after they bought McDonald Douglas? Or how about the idiots at BNSF? Or the legislation saying derivatives would not be regulated?
Very well said. If incompetent people that suffer no personal consequences are in positions of responsibility and aren’t rooted out by having their salaries clawed back, sued for damages etc. then incompetence resulting in innocent people being harmed just continues.
If you think “incompetence” by investors/bankers is a (huge) problem, what happens if the House GOP refuses to pass a clean debt ceiling bill?