From Silicon Valley to Switzerland, depositors and taxpayers are facing a mighty scare. They should not have to live with the fear and fragility they thought had been consigned to history years ago
days ago you might have thought that the banks had been fixed after the nightmare of the financial crisis in 2007-09. Now it is clear that they still have the power to cause a heart-stopping scare. A ferocious run at Silicon Valley Bank on March 9th saw $42bn in deposits flee in a day.was just one of three American lenders to collapse in the space of a week. Regulators worked frantically over the weekend to devise a rescue. Even so, customers are asking once again if their money is safe.
are vast: $620bn at the end of 2022, equivalent to about a third of the combined capital cushions of America’s banks. Fortunately, other banks are much further away from the brink thanThe financial crisis of 2007-09 was the result of reckless lending and a housing bust. Post-crisis regulations therefore sought to limit credit risk and ensure that banks hold assets that will reliably have buyers.
You might think that unrealised losses don’t matter. One problem is that the bank has bought the bond with someone else’s money, usually a deposit. Holding a bond to maturity requires matching it with deposits and as rates rise, competition for deposits increases. At the largest banks, like JPMorgan Chase or Bank of America, customers are sticky so rising rates tend to boost their earnings, thanks to floating-rate loans.
That alarming prospect explains why the Fed acted so dramatically last weekend. Since March 12th it has stood ready to make loans secured against banks’ bonds. Whereas it used to impose a haircut on the value of the collateral, it will now offer loans up to the bonds’ face value. With some long-term bonds, this can be more than 50% above market value. Given such largesse, it is all but impossible for the unrealised losses on a bank’s bonds to cause a collapse.
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