The REAL news in the Fed/Treasury moves to shore up deposits in the banks that failed last week is not the Fed/Treasury moves. The REAL news is that no other bank stepped in to take them over. Think about it...
Also news is that the cost of saving them will be spread out amongst all other FDIC insured banks for all amounts over $250.000. That's not going to be chump change, as total deposits for Silicon Valley and Signature come to approx. $300 billion and FDIC's Insurance Fund balance in the end of 2022 came to $128 billion. Sure, the failed banks' assets will be liquidated to pay out depositors but given the state of the tech and crypto industries... don't expect anything near 100 cents on the dollar for the loans.
Update: First Republic Bank stick is plunging 60% today. With $210 billion in assets, it #14 in size in the US. The dominos refuse to stop falling despite Mr. Biden’s pledge to do whatever is needed.
If BTFP existed before these bank failures, would they have failed anyway? Thoughts? Thanks.ReplyDelete
By H. Well, BTFP exists today but it’s not stopping massive stock price plunges from happening. For example, Republic -60%. The Treasury cannot backstop everything…ReplyDelete
Joseph Wang has an explanation for the Republic situation -Delete
One reason why First Republic bank looks like its imploding could be because it actually can't benefit from the Fed's new bailout facility.
"You need Treasuries and Agency MBS to tap the facility, and they barely own any."
Thank you Anon. As structured, BTFP as most all other Fed/Treasury schemes are designed to help with banks' cash flow/liquidity issues. For example, they can borrow against Treasury/MBS collateral at face value instead of market value, which has come down very significantly as interest rates spiked up.Delete
But the Fed/Treasury can do nothing about bad loans, and I think that's where the real problems are, particularly in the tech sector.
A bit more.. unlike in 2006-10 Great Debt Crisis when the problem was real estate and consumer debt, plus their associated derivatives, today's problem is corporate debt. It stands at 50% of GDP, the highest level in history (excluding the pandemic data skew). Banks exposed to such loans/securities are already being impacted as spiking interest rates make loan servicing a challenge - almost all loans are variable rate.Delete