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