How accelerating bank deposit withdrawals could harm the economy, including real estate prices. How dollars slosh around the financial system but always seem to end up at the Federal Reserve.
Topics covered include:
- How many deposits have left banks since the Silicon Valley Bank collapse
- How much have banks borrowed from the Federal Reserve to meet deposit withdrawals
- Why exiting deposits are harming bank profits and causing them to make fewer loans
- How the credit crunch could hurt commercial real estate values
- How money market mutual funds differ from banks
- How today’s banking crisis is similar to the 1980s savings and loans crisis
- What should investors do to protect their wealth
Show Notes
Assets and Liabilities of Commercial Banks in the United States—The Federal Reserve
All U.S. Banks Net Interest Margin—BankRegData
Current Treasuries and Swap Rates—Chatham Financial
Bank Turmoil Squeezes Borrowers, Raising Fears of a Slowdown by Jeanna Smialek—The New York Times
Money Market Funds: Investment Holdings Detail—The Federal Reserve
FAQs: Reverse Repurchase Agreement Operations—Federal Reserve Bank of New York
US Resolution Trust Corporation by Aidan Lawson and Lily Engbith—SSRN
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 428. It’s titled “The Coming Credit Crunch: How One Crisis Spawns The Next.”
Silicon Valley Bank Collapse
A month ago, in episode 424 of the podcast, we discussed the collapse of Silicon Valley Bank. It was a classic bank run. 96% of Silicon Valley Bank’s deposits were uninsured because they were above the $250,000 FDIC deposit insurance limit. The vast majority of those deposits were from startups and other businesses tied to the venture capital industry. When word spread that the bank was in trouble, Silicon Valley Bank depositors tried to withdraw $42 billion in one day, on March 9th, 2023. That was 24% of the bank’s deposits.
The Federal Deposit Insurance Corporation seized Silicon Valley Bank the next day before it opened. It was the second biggest bank failure in US history, second only to Washington Mutual’s collapse in 2008, and it took just a matter of hours. That weekend after the bank collapse, there was a lot of grumbling, if not fear-mongering by venture capitalists and others about those uninsured deposits.
On Sunday, that weekend, the Federal Reserve and the FDIC, after consulting with President Biden and Secretary of Treasury Yellen, announced that they would make a systemic risk exception and fully protect all depositors. Both the uninsured and the insured depositors would have access to all their money on Monday, March 13th. In the announcement, the Federal Reserve and the FDIC made a point to let everyone know that the shareholders of the bank and certain unsecured debt holders would not be protected.
Now, they’re still trying to settle Silicon Valley Bank, the bondholders, the preferred stockholders are negotiating. We’ll see what the ultimate losses are. On that same Sunday, the Federal Reserve announced a new program, the Bank Term Funding Program, BTFP. This program offers loans to banks, savings associations, credit unions that are willing to pledge high-quality collateral, such as US Treasuries, agency debt, and mortgage-backed securities.
The purpose of this lending program is to allow banks to meet deposit withdrawals without having to sell bonds that they have on their balance sheet in realized losses like Silicon Valley Bank had to do; they were selling bonds, they had all of these US Treasury bonds and other bonds that had fallen in price because interest rates had increased.
By being able to borrow the money from the Federal Reserve instead of selling bonds, then ideally, more banks won’t go insolvent because they’re having to recognize losses on bonds. Across the banking sector, there’s over $620 billion of unrealized losses on bonds that they hold.
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