New York-based Signature Bank was closed Sunday by state regulators, two days after Silicon Valley Bank (SVB) was closed by California regulators. Signature Bank had $110.36 billion in assets and $88.59 billion in deposits. The percentage of uninsured deposits exceeding the $250,000 threshold is still unknown. At the time of the SVB collapse on Friday, it was unknown what percentage of deposits exceeded the threshold.
Over the weekend, Reuters reported that 89% of the $175 billion was uninsured. The Biden administration ordered an extraordinary step be taken to restore confidence. The FDIC has assured that all depositors, insured and uninsured, will be made whole without burden to the taxpayers.
The Treasury, Federal Reserve, and FDIC released a joint statement to strengthen confidence in the banking system. The Federal Reserve Board announced it would make additional funds available to depository institutions. All depositors of both banks will be made whole, but shareholders and unsecured debtholders will not be protected. Senior management has also been removed from protection.
The Fed will make funds available by creating a new Bank Term Funding Program (BTFP). One-year loans will be available to banks, savings associations, credit unions, and eligible depository institutions. The financial institutions must collateralize their debt with Treasuries, agency debt, and mortgage-backed securities. The BTFP’s purpose is to eliminate an institution's need to sell those securities like SVB needed to do quickly.
Regional banks are struggling, and larger banks are down despite the FDIC taking action to backstop all depositors. First Republic Bank may be the next bank to fall. First Republic Bank is similar to SVB, with $212.6 billion in total assets and $176.4 billion in deposits. It is down nearly 70% since the market opened Monday, March 13.
Here are some banks' performances Monday morning (at the time of writing).
PacWest Bancorp -32%
Western Alliance Bancorp -50%
Zions Bancorporation -19%
Bank of America -3%
The creation of the BTFP has created a paradox of market uncertainty. The Fed has been removing cash from the banking system and raising interest rates to lower inflation, but the higher rates are stressing the banks. Chairman Powell has repeatedly referenced Chairman Volker's errors in controlling inflation in the late 1970s and early 1980s. Volker started and stopped raising interest rates, and every time he did, inflation spiked. Powell repeatedly says whenever he has a microphone,
“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
He is referencing his elucidation of Volker's failures. The FOMC is not in an enviable position. They must decide if reducing inflation or solidifying the banks is the priority. The Fed’s options include restarting the inflation cycle or letting the banks fail.
The markets think the Fed will focus on keeping banks solvent. On March 10, 40.2% of the market believed a 50-basis point raise was coming on March 22. Today, 0% of the market thinks a 50-basis point hike is coming. Goldman Sachs believes the Fed will not raise interest rates at all at the next FOMC meeting to relieve pressure on the banks.
“In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22,”
Goldman economist Jan Hatzius said in a Sunday note. Goldman’s new interest rate prediction is the fourth changed prediction in the last six weeks.
What Does it Mean?
The Biden administration is trying to stop the financial bleeding by going big on SVB and Signature bank. The administration’s response may lull many people into a false hope and sense of security for a few reasons. First, there is a schedule of payments in a bank failure, and depositors are almost last on the list. The Biden administration used emergency powers to jump depositors to the front of the line contrary to the law. CNN described the action as “extraordinary.” Second, the FDIC can easily handle small to medium bank collapses but is not equipped for widespread failures or collapse of the big banks. Marketwatch reported 20 banks with similar liquidity problems to SVB and Signature. Suppose the bank failures continue. Many Americans will receive different guarantees from the FDIC because the funds will not be available. Read about the FDIC’s capabilities here.
In that article, I explained that the FDIC's funding capabilities total about $225 billion, about 2% of all deposits. The FDIC has approximately $124.5 billion on its balance sheet and a line of credit of $100 billion from the federal government. The graph shows the percentage of deposits the balance sheet covers. There is more than $20 trillion in the banking system.
The price of gold before the SVB announcement on Friday, March 10, was $1831.37. The price (at the time of writing) on Monday, March 13, is $1916.84. Gold has risen $85.47 or 4.6% in two business days. The VIX, which measures market volatility, has risen 10.15% since Friday (at the time of writing). The market is very nervous.
There is significant uncertainty in the market, and people are deciding what to do with their money. Marketwatch reported that depositors are pulling cash from regional banks and moving them to "too big to fail" banks. “Too big to fail” is another way of saying the burden of the taxpayers. In other words, the depositors foolishly decided a few extra blankets would keep their finances safe from the tornado ripping through the economy. Instead of trusting your wealth to bad math and broken promises, why not keep it in precious metals? Precious metals have survived every financial and banking disaster for thousands of years. Precious metals can help protect your purchasing power through this one too. Where do you want to put your money?