Just a week ago, coinciding with the intervention of the Silicon Valley Bank (SVB), Kiska, the loneliest orca in the world, died. The cetacean lived in a Canadian theme park, deprived of liberty since 1979 when, as now, inflation was out of control.
The recent problems in the banking system are reminiscent of whales floating on the water, something that happens when some fiend fishes with explosives and the shock wave not only strikes down the splashing fish, but sometimes also carries away some other whale
The high inflation has forced the Central Banks to be very aggressive in the withdrawal of stimuli. Likewise, the biggest monetary restriction of the last 40 years (since Kiska was imprisoned in Iceland), is causing the fragilities of the system to come to the surface and something can “break”. In a week Silicon Valley and Signature Bank have gone bankrupt, the Swiss National Bank will inject 51,000 million euros into Credit Suisse to avoid its collapse and a group of “altruistic” American banks has deposited 30,000 million dollars in the First Republic Bank for 4 months .
The US authorities have been very quick and have taken unprecedented measures to limit the problems in the weakest entities, guaranteeing 100% of the deposits of the clients of the bankrupt banks and, through the Bank Term Funding Program, they will offer liquidity to the entities without the bonds they provide as collateral having to be valued at the market, preventing them from being forced to sell assets, as happened to SVB.
For now the problems are idiosyncratic. For example, SVB had the highest concentration of deposits in the country (an average of $4.2 million per client, when the Deposit Guarantee Fund only covered up to $250,000) which became a repayment accelerator as soon as things got complicated.
Today’s banking system has nothing to do with 2008 because Basel has established greater supervision, regulation and transparency. The banks are much more robust – in the euro area the Tier 1 capital ratio is 16.1% and that of the large American entities is 14% compared to the 8.3% that both had then.
However, the US banking authorities will have to continue working hard to increase the requirements that the Trump administration relaxed in 2019 for smaller entities (with assets less than 700,000 million). Like SVB, for the purposes of calculating regulatory capital, the law allows them to exclude unrealized losses from assets on their balance sheet computed as available-for-sale, making them more vulnerable when there are problems.
In any case, what is clear is that recent events will make credit more expensive and financial conditions worsen, which will end up affecting companies, increasing the risk of a hard landing for the economy. We are not facing a systemic problem, but prudence with the sea and with the stock market.
Joan Bonet Majó, is Director of Market Strategy and Consulting at Banca March
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