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Deception At Its Finest: The Truth Behind The Smoke
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Deception At Its Finest: The Truth Behind The Smoke

The Deception Behind Appearances

Mar 22, 2023
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Deception At Its Finest: The Truth Behind The Smoke
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Source: Pexels

Over the weekend, a statement was released regarding the critical situation at Credit Suisse, stating that all central banks have agreed to do "whatever it takes" to prevent a liquidity crisis.

Just last week, the European Central Bank was raising rates by 0.5% amidst the turmoil in Europe and the world with the fall of SVB and Silvergate, and now they have announced they will flood the market with liquidity.

If last week the Fed carried out the most aggressive hike since March 2020, now it will be the turn of other central banks.

If you missed the incredible rise of the main risk assets in the previous massive injection of liquidity, don't make the same mistake and get on board before it's too late.

But first, let's review the situation as it stands:

Regional Banks: The problem is real

Despite the Federal Reserve making us believe that nothing is happening with regional banks, the truth is that something is happening...

Small and medium-sized banks (less than $250 billion) represent 50% of commercial and industrial loans in the United States, 60% of residential real estate loans, 80% of commercial real estate loans, and 45% of consumer loans.

Exhibit 1: Banks With Less Than Billion in Assets Account for About Half of All Commercial and 
Industrial Lending 
Exhibit 2: Small and Medium-Sized Banks Account for of Total Residential Lending 
Percent 
40 
10 
<SIOOM 
C&l Loans 
>S250E 
10 
Percent 
40 
20 
10 
stcou-S18 s•.o-S250B 
By Bank Assets 
FDIC 
Retail 
SO FM 
Residential Loans 
$10-s250a 
By Bank Assets 
Retail 
hsumd... 
Percent 
40 
20 
10 
Failed 
so Far 
Source: Fgdgral Ogwsit "surarce Corwation. Goldrmn Sachs Glc&l Investment 
Exhibit 3: Small and Medium-Sized Banks Account for About of Total Commercial Real Estate Lending 
*'urtv Fadaral Omit hsuraree Cowation. Goldrnan Sachs Glotnl Investment Rosoarth 
Exhibit 4: Small and Medium-Sized Banks Account for About 45% of Total Consumer Loans 
Consumer Loans 
Percent 
40 
10 
CSI 00M 
CRE Loans 
>S250B 
Percent 
10 
SO FM 
10 
4100M 
>S2SOE 
SICOM-S18 Sl-S108 SIO-S2508 
By Bank Assets 
10 
FDIC 
so 
c35% 
st OOH-SIB 
By Bank Assets 
Source: Federal Ogwsit insurame Corwation. Goldrrzn Sachs Glc&l Investmen Research 
Sane : Äwarce Corwatm Go— Sachs Invegw.t

However, if we set aside the percentages and focus on the number of banks in trouble, the situation worsens. Silicon Valley Bank collapsed after the interest rate hike decreased the value of its assets, and concerned clients rushed to withdraw uninsured deposits.

In an article published this week in the Social Science Research Network, economists calculated how much market value individual US banks' asset books have lost during the drastic Federal Reserve rate hike. The value of such assets, which often include Treasury bonds and mortgage loans, drops when new bonds have higher rates.

The economists also examined the proportion of bank funding that comes from uninsured depositors or accounts with over $250,000.

They estimated that there are 186 US banks where, if half of uninsured depositors quickly withdraw their funds, even insured depositors could face deteriorations because the bank would not have enough assets to recover all depositors, which could force the FDIC to intervene.

The research carries an important warning: it does not take into account coverage, which can help protect many banks against interest rate increases.

"Our calculations suggest that these banks certainly face the potential risk of a run, in the absence of other intervention or government recapitalization," the economists wrote.

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