Quoth the Raven: The Economy Is a Powder Keg, Boiling Over and Ready to Blow
Since March, five banks have collapsed. Four of them have been in the United States. And they mark the second, third, and fourth largest bank failures in history. The fifth is Credit Suisse, an international player.
These banks largely collapsed due to an imbalance between their short-term borrowing and their long-term investments. Banks typically receive customer deposits and can use that as collateral for other assets, such as long-term bonds.
The rapidly rising interest rates of the past year led to a massive imbalance. One bank, Silvergate, chose to voluntarily wind down operations.
Silicon Valley Bank, the first of the collapsing institutions, had “risk free” long-term U.S. Treasuries on their books. But those assets were marked down as interest rates soared over the past year.
The initial wave of bank failures then led to a six week pause. Government stepped up with assistance to regional banks. And big banks did a stealth bailout, providing excess deposits for these institutions.
Yet six weeks later, First Republic Bancorp was shut down.
All told, these bank drops aren’t the sign of a healthy economy. They’re a sign that tremendous misallocations occurred from years of interest rates being set at zero. And that things may get worse before they get better. Especially as interest rates are set to continue higher.