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U.S. Bank Failures & Downward Trending Par Rates
Source: Federal Reserve
In light of another pending U.S. bank failure, in $PACW it’s worth examining the cause & outlook. A lender’s business model is to borrow short-term and invest long-term, allowing it to take advantage of higher risk premiums on LT debt. Since the start of last year, the yield curve’s inversion has resulted in many banks flipping their models and investing short-term to exploit yields on the shorter end. However, the spread between ST investments and funding costs is quite low, and unfortunately, banks with smaller market shares have not been able to keep funding costs at bay, which has led to failures.
What’s ahead? Much of the same until the Federal Reserve slashes interest rates. At the moment, they think they can keep rates high because of the belief that bail-in contingencies and other post-2008 created tools will prevent widespread systemic risk.
FDIC limit extension the only "saviour" in this situation?
@rihardjarc The issue is just, to what extent can you insure? Also, if you do bail-ins on every failed regional bank and squeeze out shareholders, when will that start having an effect on the stock market? Deposits typically reprice after investments, and we are seeing that now. You can hike the return on money market accounts, but ideally, you need people spending again; you need higher asset prices and overall higher confidence because this is becoming a confidence problem among depositors instead of a 'theoretical' structural concern.
@pger The 'confidence problem' aspect is the scariest part for me. Especially since this is playing out as a consistent drip of a new bank failing every month. The longer this goes on, the more people will start to lose trust in the system. Negative feedback loops are scary.
@nathanworden Indeed, the media will latch onto it and before you know it 9/10 retail depositors will wonder whether they should still keep money in the bank.
@pger I think at this moment it is better to extend the limit and stop the confidence loss in the system than to continually bail-out every failing bank out there. It looks like a wounded man bleeding right now. At the end of the day if it continues like this you won't have any regional bank and bank investors left and the government will have to write a far bigger check than what they would have done with the limit extension. It's not ideal but I think it's the best move they could make right now.
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