“This Should Scare The Hell Out Of Bankers & Regulators Worldwide”

From “everyday joes” to the corporate CFOs, men, women, and others, are frantically battling a prisoner’s dilemma about their banking relationship this weekend: “I’m fine if they don’t draw their money, and they’re fine if I don’t draw mine…”

But, given the lines outside banks and less than reassuring sentiment from Washington, we suspect it is too late and the that dilemma is over – now it’s every man, woman, and child for themselves. As The FT report on one CFOs decision-tree:

“I got a text from another friend – he was definitely moving his money to JPMorgan. It was happening,” the finance chief said.

“The social contract that we might have collectively had was too fragile. I called our CEO and we wired 97 per cent of our deposits to HSBC by midday on Thursday.”

And as explained below, the new normal ‘bank run’ is instant, huge, and devastating.

Given that there are many ‘bad’ (read: biased and/or uninformed) takes on the situation at SVB, Bianco Research’s founder and President, Jim Bianco, tried to clarify in a brief Twitter thread: (emphasis ours)

This is not a solvency crisis like 2008.

Bad loans or poor investments were not made. Money was not lost. So, everyone is going to get their money back. (And please no takes about no interest rate hedging. Asset/liability mismatches are how banking works.)

[ZH: We agree broadly but do worry, as we detailed on Thursday, about the CRE/office exposure overhang on small banks and how higher rates will actually translate to actual loan losses, not just HTM “temporary” losses.]

Instead this is an old fashion 1930s liquidity crisis.

Too many depositors demanded cash at once (as in right now) and SVB (and SI) could not convert loans and securities (and crypto) to cash that quickly. So, everyone is getting their money back from SVB (and SI), just not at 8AM Monday. And, yes this is a big problem as this is working capital for a lot of companies. They have payrolls to meet and vendors to pay next week. And if they don’t pay bills and employees, they in turn don’t pay their bills and this can quickly cascade into a major economic problem.

The important question is why so many demanded their money back at once.

And I’m not referring to the last two days. I’m asking about the days/weeks leading up to this last two days forcing SVB to sell securities and realize a $1.8B loss, necessitating a capital raise. Why were depositors withdrawing in big enough amounts before Thursday/Friday?

First, welcome to the world of mobile banking.

Gone are the frictions of standing in line with tellers instructed to count money slowly. (Media images of lines Friday were largely gawkers)

Question: How did $42 billion get withdrawn Friday alone without thousands in line?

Answer: your phone!

This is not the Bailey Savings and Loan anymore.

This should scare the hell of bankers and regulators worldwide.

The entire $17 trillion deposit base is now on a hair trigger expecting instant liquidity.

Add in social media and millions get a message, like Peter Thiel telling Founders companies to pull out, or Senator Warren gloating that SI went under, and pick up their phone open a Chase account and Venmo-ed their life savings into it in 10 minutes.

[ZH: Once SI died, Warren’s dancing on its grave started the dominos falling…]

Instant liquidity (not solvency) crisis with everyone still in bed.

Banking will never be the same.

The second, and I did a long thread on this on Friday… banks are over-reserved, after 14 years of QE, and are still paying 0.50% on accounts when T-bills are yielding 5.00%. They don’t need to compete for deposits.

2/14

Over the past year, banks kept rates on checking/saving accounts extremely low compared to MM funds. The avg yield on a MM (blue) reached as high as 4.43% recently, while bank rates (orange) remained at just 0.48%. The gap was almost 4% (red). pic.twitter.com/96PwaEpsrx

— Jim Bianco biancoresearch.eth (@biancoresearch) March 10, 2023

Initially as rates passed 2%, 3% and 4%, the public did not notice. So bankers thought deposits were well anchored at their bank and not moving regardless of the interest rate paid.

But at 5% the public finally noticed, and millions reached for the phone at once and transferred to a money market account or Treasury direct to buy T-bills. Banks were squeezed to convert loans and securities to cash instantly so depositors could leave for better rates.

Add in the bleed out from tech firms struggling, and Senator Warrens tweeting with glee about SI going out of business, and depositors at SVB got the message and picked up their phones and acted.

This is why I have been tweeting that this has to stop now.

The Fed is meeting Monday at 11:30. Too late!

They need to meet today (Sunday) at 11:30.

What needs to be done?

Two things.

1. The FDIC needs to raise the deposit insurance ceiling to unlimited as they did this in 2008. Besides $250k is a made up number anyway. So make up a bigger number.

2. Banks need to get their deposit base to stop figuring out how to buy a 4.5% money market fund. They need to raise the interest rates they pay 3.00% – 3.50%, from 0.50%, immediately. Yes, this will kill bank profitability so expect Bank Execs to balk at doing this.

This way the public gets the message that you money is safe, no matter the bank, or the amount, and the rate paid on your money is at least competitive with other alternatives.

Otherwise, if they do nothing and wait for the Fed to START a meeting at 11:30 Monday, hundreds of billions of deposits will have moved by phone and it will be far worse.