Bank Runs, Blow Ups And Backstops Are Here

The sky is dark gray, there’s no sunshine today…

The gloom moved in on Friday when Silicon Valley Bank was abruptly shutdown by the FDIC. This deviated from the norm when it comes to bank closers. Those usually take effect after hours on Friday, in an orderly fashion I might add.

However, the panic was so severe concerning Silicon Valley Bank, depositors started a “bank run,” whisking their funds out of the financially troubled institution. So that’s why the FDIC stepped in so abruptly. To stop the panic, and prevent bank runs at other institutions.

I discussed some of this on our forum the other day.

Yet, the doom train doesn’t stop there…

Nope!

She keeps racing down the tracks.

It made a quick stop at Signature Bank which was shutdown yesterday by the FDIC. This is highly abnormal, again, bank closers usually take place on Friday afternoon. That’s how fast this is moving.

Get this, Signature Bank had $110.4 billion in assets as of December 31st. So that makes Signature Banks shutdown the 3rd biggest bank failure U.S. history, right behind Silicon Valley Bank, and of course Washington Mutual from back in 2008.

As a side note, don’t forget about crypto loving Silvergate Capitol that closed up shop on the 8th.

So already in 2023, things are blowing up, and blowing up big they are.

There’s also lots of fear with First Republic Bank, whose shares tanked over 60% in after hours trading.

So, what shall the day bring…

Who knows, but there’s contagion in the financial system at this point. In fact, the fear and panic is beginning to spread around the world, from London to Singapore.

Pray tell, where have I seen this episode before?

Why it was the 2008 financial crisis!

All right, here’s where I hit the brakes on the doom train. Now we need to understand why this has happened, and what our savior, I mean government is doing to protect us.

Bank Mismanagement

Essentially, Silicon Valley Bank (SVB) tanked as it was mismanaged. Their whole focus was risky business (tech) startups that burn through investment cash. Even worse, they held long positions in bonds at low rates. Today, 10/30 bonds are around 5%.

So when SVB sold those 1.5% bond notes, they lost big time! Say to the tune of $1.8 billion dollars. A long story short, this essentially led to the bank runs. Not to mention, venture capital firms that invested in these startup companies told said companies to yank their cash from the bank.

What a mess.

Now, enter Signature Bank, they invested heavily in the crypto scene, and apparently, so does First Republic Bank. So once again, we have banks being mismanaged and what happens when they fail?

They get bailed out.

Well, they’re calling it “backstops” these days, but it is a form of bailout.

Let’s talk about it.

Bailouts And Backstops

First up, here’s the FDIC’s Failed Bank list, you’ll see the two new additions.

With respect to Signature Bank, the FDIC said,

All depositors of the institution will be made whole. No losses will be borne by the taxpayers. Shareholders and certain unsecured debt holders will not be protected. Senior management has also been removed.

FDIC

So there’s the bailout, err “backstop.”

This also applies to Silicon Valley Bank as well.

Now that bank failed, but all depositors “will be made whole.” As we all know, the FDIC only guarantees up to $250,000 in your bank account. Yet, these souls were saved. Yet, it’s not a “bailout,” as the taxpayer will not foot the bill. You’ll also notice, investors got whacked.

So who’s paying the bailout bill then?

Any losses to the Deposit Insurance Fund (DIF) to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

FDIC

The banking industry will pay for the bailout.

Now this action is new stuff, this has never happened before. In fact, these bailout tactics were approved in a new fancy scheme called, “systemic risk exception.” It’s a joint statement by the Department of the Treasury, Federal Reserve, and FDIC.

You know, the big boys.

It states,

…the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

FDIC

So I jumped over to the Federal Reserve’s site to learn a bit more…

The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging  U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par.

Federal Reserve

So here’s the deal.

The Federal Reserve is offering a lifeline to any future bank who runs into liquidity issues as SVB did. If you recall, SVB had to sell bonds for a loss to raise capitol.

Moving forward, and under the new BTFP program, said bank can “pledge” some of their assets (bonds) to the Federal Reserve in return for a loan. Since it’s “valued at par,” that means said bank will receive the full value of their investment in the form of a loan, not just the prevailing market rate.

Remember, SVB sold their 1.5% bonds at a major loss.

Moving forward, that won’t be the case.

More details…

The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.

See?

So the plan appears to be:

  1. The Federal Reserve gives (invents) the FDIC cash as needed.
  2. The FDIC ensures all deposits with said cash.
  3. The FDIC sells bank assets.
  4. The FDIC charges the bank industry a “special assessment.”
  5. The FDIC then pays back the Federal Reserve.

Additionally,

…the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP

Federal Reserve

So there’s now two different forms of government assistance to ensure banks don’t collapse.

But will it be enough?

Conclusion

So the good news is the sky is beginning to clear up for the moment. Taxpayers are not on the hook, but the government didn’t allow the system to work. Depositors should have lost anything over $250,000.

This would have ensured people and corporations who invest in said banks choose wisely. This just removes that responsibility from the individual and, well, protects the rich and said banks. We need mismanaged institutions and those who thrive on unrelenting risk to fail.

We need these inflated dollars to vanish in order to bring some normalcy to society.

Pray tell, where did all those inflated dollars come from, and what caused so much trouble?

Your Federal Government, over the last 15 years, not to mention the low interest rates brought on by the not so Federal Reserve.

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