Silicon Valley Bank may be the start of something grimmer

Banking is a confidence trick. Financial history is littered with runs, for the straightforward reason that no bank can survive if enough depositors want to be repaid at the same time. 

The trick, therefore, is to ensure that customers never have cause to whisk away their cash.  

First, all depositors in svb and Signature would be made whole, and straightaway.

Second, the Federal Reserve would create a new emergency-lending facility, the Bank Term Funding Programme. This would allow banks to deposit high-quality assets, like Treasuries or mortgage bonds backed by government agencies, in return for a cash advance worth the face value of the asset, rather than its market value. 

Banks that had loaded up on bonds which had fallen in price would thus be protected from svb’s fate.

These events raise profound questions about America’s banking system. 

Acting as a lender of last resort is one of any central bank’s most important functions. As Walter Bagehot, a former editor of The Economist, wrote 150 years ago in “Lombard Street”, a central bank’s job is “to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent.” That “may not save the bank; but if it do not, nothing will save it.”

Fed’s new facility is something of a confidence trick itself. 

The programme will prop up struggling banks only so long as depositors think it will. Borrowing through the facility is done at market rates of around 4.5%. 

This means that if the interest income a bank earns on its assets is below that—and its low-cost deposits leave—the institution will simply die a slow death from quarterly net-interest income losses, rather than a quick one brought about by a bank run.

Pessimists worry banks now failing because of higher rates are just the first domino to collapse.

The Ecoomist 16  March 2023  

Don’t panic. That’s the message financial regulators are sending

Jason Zweig WSJ 17 March 2023

JPMorgan m fl banker sätter in typ 300 miljarder i krisbank.

Det var ett stort principgenombrott när myndigheterna betalade ersättning till alla insättare i Silicon Valley Bank, dvs även till insättare med belopp över det tak som finns.

Englund blogg 16 March 2023


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