Right before a major hiking cycle by the Fed, both large and small banks decided to deploy deposits.
Smaller regional banks went all in.
It was a major mistake that resulted in three US bank failures. Silvergate Bank, Silicon Valley Bank, and Signature Bank, collapsed and were taken over by the FDIC because of duration mismatch losses and runs on the banks.
Securities in Bank Credit
Securities in bank credit largely consist of Treasuries and Agencies (mortgage backed securities).
Both large and small banks loaded up on duration risk at precisely the wrong time. Estimates of unrealized bank losses range from $625 billion up to $2 trillion.
Residential Real Estate
The beginning of 2022 was an amazingly bad time to increase exposure to residential real estate.
Small banks increased exposure more than large banks. Given price declines, most of those homes are now worth less than the mortgage.
Commercial Real Estate
Smaller regional banks are much more exposed to commercial real estate loans than larger banks.
As with residential, property values are declining making risk of default greater.
Who’s Holding the Losses?
Commercial Mortgage Backed Securities Index
Not Just a US Problem
https://twitter.com/Laeeth/status/1639755508021186560
Money Supply Is Headed for 6th Month of Contraction
Please note Money Supply Is Headed for 6th Month of Contraction
Whether the Fed pledges to temporarily paper over bank losses, the losses are still real.
Expect further contractions in credit as a result.
MishTalk Video, What’s the Real Risk Now, Is it Inflation or Deflation?
Given the obvious inflationary forces, that may seem like a silly question, but let’s take a closer look in a video discussion.
Please consider What’s the Real Risk Now, Is it Inflation or Deflation?
If you understand credit, you may know the answer, but if you have not seen the post, please take a look.
This post originated at MishTalk.Com
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Mish
in his book: “The Courage to Act”: “Monetary policy cannot be directed at a
single class of assets”. I guess MBS purchases don’t count.
Banking and Branching Efficiency Act of 1994 contributed to the problem. Banks pay for the deposits that they already own. Commercial bank credit creation is determined by monetary policy, not the savings practices of the nonbank public.
the standpoint of the commercial banks, DFIs, the monetary savings practices of
the public are reflected in the velocity of their deposits and not in their
volume. Whether the public saves, or dis-saves, chooses to hold their savings
in the DFIs, or transfers them to the NBFIs, will not, per se, alter the total system assets, or system liabilities of the DFIs – nor alter the forms of these assets and
liabilities.
There is a problem for China. What do they buy with reals? They go one week to Copacabana, good. They buy samba vynils, marvelous. And… they need to change the reals to dollar if they want to buy good cars, good wine or send the children to a good college.