TFTC: Killer Whale Liquidity Crisis
While markets have had a strong trend higher so far this year, there’s a limit to how high stocks can go. One measure is in interest rates, which control the cost of capital. Rates have been on the rise, leading to a drop in lending activity.
But there could also be a liquidity crisis underway. That’s what led to the bank failures back in March. The failed banks had enough assets, but not enough liquidity to meet depositor needs.
When just 10 depositors left Silicon Valley Bank, taking $13 billion, the bank was gutted within days. It also didn’t help that the bank invested in long-term Treasury bonds. But the biggest issue was the rapid rate of capital outflow.
That’s also the kind of liquidity problem that could hit any bank at any time. And it’s harder to protect a bank facing rapid and massive deposit outflow.
Investors should prepare for the possibility of more bank failures this year. It may not happen to banks as big as Silicon Valley Bank. And it may not happen until the Federal Reserve raises interest rates again.
But it’s still a strong possibility. And markets could see a small selloff as it happens, much like the March drop in markets. In a worst-case scenario, it could even mean a market correction.