Al-anwar Newspaper English news in Australia
It is hard for Australians to believe, but the US has 4800 banks. That is one bank for every 70,000 people. In Australia, the ratio is one bank for every 260,000 people. This makes the US hugely over-banked by Australian standards which leads to all sorts of outcomes, both good and bad.
The good includes intense competition and cheap prices; a strong tolerance for risk, and readily available credit. As well as highly competent people climbing a very tough greasy pole to the top. Not surprisingly, the bad is the reverse of the good – slim margins, high risk of failure, and a propensity for bubbles and credit crunches. As well as not having enough competent folks to people so many banks!
Silicon Valley Bank (SVB) and the system
These various pros and cons are on full display in the weekend’s blow-up in the US regional bank sector. Silicon Valley Bank (and several others) failed at spectacular speed owing to innovative business models.
In particular, SVB offered mad incentives to establish a deposit base of technology start-ups with chunks of money far larger than the $US250,000 ($A375,000) guaranteed by the Federal Deposit Insurance Corporation (FDIC).
This short-term money was then invested in long-duration assets like US Treasuries. But, as short-term interest rates rose above long-term, the play turned loss-making, as it always does for those that take too much risk.
-ADVERTISEMENT-
Once word got around, the tech depositors pulled money at lightning speed and the bank collapsed equally fast.
This is a classic credit crunch dynamic.
The bailout
With such a huge and wild banking culture, US authorities are well-practised at rescues. They wasted no time in coming up with solutions to this one: SVB and two other banks were seized, deposits for all banks were guaranteed, and the Federal Reserve established a new facility to allow banks to pledge their long-duration assets for cash at their full value, effectively erasing losses on investments like those that killed SVB.
In one sense, this is understandable. Standing on principle as a bank run takes place is absurdly self-defeating. Bond and equity holders will still take losses.
Yet, in another, it is over the top. The banks are being made whole on some of their investments because not doing so might pose systemic risk.
That is a bailout.
The fallout So, is it over? That is a multifaceted question. In terms of the bank run, who can tell? US depositors are now all guaranteed by the FDIC. But it only holds $US125 billion ($A188 billion) whereas the US banking system has $US18 trillion ($A27 trillion) in deposits.
Is that enough to persuade depositors that their money is safe in regional banks?
Making matters worse, US jobs numbers on Friday were good and the Federal Reserve will have to keep lifting interest rates.
So the US finds itself in the bizarre position of having to bail out banks even as it keeps creating new problems in the credit system to bring down inflation. This monetary tightening has already blown Arkegos, Credit Suisse, Sri Lanka, Gilts and now US regional banks. Are we at the end of the business cycle yet?
