A Note on Bank Liquidity
In the wake of a crazy news weekend around bank deposits, liquidity, and a re-run of 2008; I wanted to share a long tweet from Jim Bianco of Bianco Research. There are THOUSANDS of news articles, opinions, conspiracies, and fear-mongering threats, around what did and will happen. I’ve been following Jim for a long time and feel he’s a sensible and responsible investor that does his due diligence. He tweeted this, and I thought it was worth a share.
SVB stands for Silicon Valley Bank and here is a quick snippet of his tweet in which you can find in its entirety linked below.
Lots of really bad takes about SVB. Let’s try and correct.
This is not a solvency crisis like 2008. Bad loans or poor investments were not made. Money was not lost. So, everyone is going to get their money back. (And please no takes about no interest rate hedging. Asset/liability mismatches are how banking works.)
Instead this is an old fashion 1930s liquidity crisis. Too many depositors demanded cash at once (as in right now) and SVB (and SI) could not convert loans and securities (and crypto) to cash that quickly. So, everyone is getting their money back from SVB (and SI), just not at 8AM Monday. And, yes this is a big problem as this is working capital for a lot of companies. They have payrolls to meet and vendors to pay next week. And if they don’t pay bills and employees, they in turn don’t pay their bills and this can quickly cascade into a major economic problem.
The important question is why so many demanded their money back at once. And I’m not referring to the last two days. I’m asking about the days/weeks leading up to this last two days forcing SVB to sell securities and realize a $1.8B loss, necessitating a capital raise. Why were depositors withdrawing in big enough amounts before Thursday/Friday?
First, welcome to the world of mobile banking. Gone are the frictions of standing in line with tellers instructed to count money slowly. (Media images of lines Friday were largely gawkers)
How did $42 billion get withdrawn Friday alone without thousands in line? Answer, your phone! This is not the Bailey Savings and Loan anymore.
This should scare the hell of bankers and regulators worldwide. The entire $17 trillion deposit base is now on a hair trigger expecting instant liquidity.
Add in social media and millions get a message, like Peter Thiel telling Founders companies to pull out, or Senator Warren gloating that SI went under, and pick up their phone open a Chase account and Venmo-ed their life savings into it in 10 minutes. Instant liquidity (not solvency) crisis with everyone still in bed.
Banking will never be the same.
The second, and I did a long thread on this on Friday … banks are over-reserved, after 14 years of QE, and are still paying 0.50% on accounts when T-bills are yielding 5.00%. They don’t need to compete for deposits.
Initially as rates passed 2%, 3% and 4%, the public did not notice. So bankers thought deposits were well anchored at their bank and not moving regardless of the interest rate paid.
But at 5% the public finally noticed, and millions reached for the phone at once and transferred to a money market account or Treasury direct to buy T-bills. Banks were squeezed to convert loans and securities to cash instantly so depositors could leave for better rates.
Add in the bleed out from tech firms struggling, and Senator Warrens tweeting with glee about SI going out of business, and depositors at SVB got the message and picked up their phones and acted.
Lots of really bad takes about SVB. Let’s try and correct
— Jim Bianco biancoresearch.eth (@biancoresearch) March 12, 2023
This is not a solvency crisis like 2008. Bad loans or poor investments were not made. Money was not lost. So, everyone is going to get their money back. (And please no takes about no interest rate hedging.… https://t.co/5lHC9xZ9vg
Here’s an update from CNBC on what Regulators and the Federal Reserve are doing with the given situation:
BREAKING: Regulators unveil plan that “fully protects all depositors” of Silicon Valley Bank, also says Signature Bank has been closed state authorities https://t.co/bwh51HfkDa
— CNBC Now (@CNBCnow) March 12, 2023
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