WTHIH? The Bank Run Version of 2023

Silvergate, Silicon Valley and Signature go under. It' the Si-bank run.

Silicon Valley Bank (SVB) tried to raise money on Friday, because bets on long duration bonds at peak levels caused billions in losses as the Fed started to hike rates. The gist is SVB didn’t have a solvency problem, but it had a liquidity problem as VC-backed companies started to bleed cash and their deposit balances in SVB dropped.

After the Silvergate event, leaders in the VC world more or less orchestrated a bank run and withdrew deposits from SVB that the latter could not actually pay. That’s why SVB went under.

If you take deposits and buy 10-yearish treasuries and MBS but suddenly all your depositors want their money — your business model is broken.

SVB was borrowing short and lending long, but this traditional banking model is inherently fragile. If you can no longer “borrow short” from your no-longer faithful depositors, you are done.

The Fed et al. (the "Troika") was forced to act fast during the weekend to 1) relieve SVB depositor worries of a haircut and 2) stop contagion fears that this would happen to other banks. Even so, depositors were pulling cash from other banks.

I don't see what their incentive is now as the Troika has shown it's going to more or less backstop everyone. But now we have a different problem - a "flight to safety" and more worries. Investors don't want to own banks but they want to own Sovereigns. No one wants to be holding the bag if things become worse. At this point a bank run is NOT a requirement for a bank to go to 0…👇

Even a forced recapitalisation¹ (or the suggestion of it) could take these banks down 80%... Who wants that?

Depending on how fast the regulators act and how fast smaller banks are acquired and made "safe" — will dictate how this will play out.

These events unfolding suddenly removes further rate hikes from the table and puts inflation fears in the back burner. Who cares about inflation if solvency is now in question?

European banks are dumping hard this morning. Credit Suisse is down 12%, Deutsche Bank is down 7% and HSBC is down 4%.

The big money right now is made in treasuries, the German 2-year is up 9% and the US 2-year is up 6.5%. Our beloved 10-Year JGB was trading at 0.50% a few days ago and now its at 0.28%!

What we are witnessing is a good old flight to safety, at least until things clear out. The Fed finds itself with an inflation problem, a liquidity problem and a confidence problem…

This year is going to be exciting.

“Bulls make money, bears make money, pigs get slaughtered.”

Sincerely,

Philo 🦉

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1. It happened in Greece, multiple times. My essay on the Greek recovery here.