In short, this isn’t 2008. But it’s also not nothing.

Keep dropping grains of sand long enough and you will eventually trigger an avalanche. “Eventually” is the key word. Exactly which grain will do it, you can’t know.

In just the last week we’ve seen the second- and third-largest bank failures in US history.

This is how modern banking works. In simple terms, the bank borrows money from you then lends it to someone else. If all goes well, the bank profits from the difference between its cost of funds (the interest it pays depositors) and interest received on the loans it makes.

Running a bank is a balancing act because the assets (loans) and liabilities (deposits) have different maturities. 

People can demand their cash any time but the bank can’t call in its loans, at least not quickly. It works only because most people leave their balances in place most of the time. 

Joseph R. Mason and Kris James Mitchener wrote a brief (and sadly overlooked) piece for the WSJ on Wednesday.  Quoting:

“Even if midsize banks had been subjected to the same scrutiny as large banks, it isn’t clear that stress testing them would have led to changes that would have prevented failure. Why? Because the tests asked the wrong questions. They failed to encompass the scenarios that ultimately led to SVB’s demise—large and rapid increases in interest rates.

A reasonable observer would expect FOMC’s policy objectives to have been embedded in the 2023 Stress Test Scenarios. But by February 2023 [!!!!], the Fed still hadn’t changed its regulations to match its monetary policy."

John Mauldin 17 March 2023



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