After watching the dysfunction surrounding the failures of Silicon Valley Bank and Signature Bank, Americans are withdrawing their bank deposits and placing them in other places, such as money market fund accounts. Brooke Masters, Harriet Clarfelt, and Kate Duguid report for the Financial Times: Goldman Sachs, JPMorgan Chase and Fidelity are the biggest winners from investors pouring cash into US money market funds over the past two weeks, as the collapse of two regional US banks and the rescue deal for Credit Suisse raised concerns about the safety of bank deposits. More than $286bn has … [Read more...]
Trouble Now Brewing at Deutsche Bank
European banks are experiencing a bit of turmoil, and it looks like Deutsche Bank is the next victim. Martha Muir, Katie Martin, and Sam Fleming report in the Financial Times: Bank stocks took a heavy hit on Friday, with Deutsche Bank falling 10 per cent, as policymakers struggled to calm nerves after failures on both sides of the Atlantic. The Stoxx 600 banks index, which contains Europe’s biggest lenders, fell 3.6 per cent by mid-afternoon, outstripping weakness in broad national indices. Germany’s Commerzbank fell 5 per cent while France’s Société Générale lost 5.6 per cent. “Europe … [Read more...]
Are 0DTE Options a Threat to Markets?
In Bloomberg, Lu Wang discusses the growing use of 0DTE options and their potential to cause market volatility, writing: Discovered by retail investors as a cheap way of gambling during the meme-stock era in 2021, zero-day options got a fresh boost on index trading after firms like Cboe Global Markets Inc. last year expanded S&P 500 options expirations to cover each weekday. The offerings became an instant hit among institutions as daily reversals ruled the market, spurred by the Federal Reserve’s most aggressive monetary tightening in decades. By the third quarter of 2022, 0DTE … [Read more...]
Treasury Studying How to Increase Deposit Insurance
Big news here, even if there isn’t yet an explicit guarantee. Treasury Secretary Yellen indicated policymakers may intervene to protect depositors at smaller banks. It is also reported that US officials are studying ways to temporarily extend FDIC insurance to all depositors. This news should be well received by the market and banks. James Politi reports in the Financial Times: Janet Yellen will signal further US government backing for deposits at smaller American banks if needed, a shift that seeks to protect parts of the country’s banking system struggling in the recent financial … [Read more...]
Who’s to Blame for Banking Vulnerability?
In Barron's, Viral V. Acharya and Raghuram Rajan explain how quantitative easing may have left the banking system vulnerable to volatility. They conclude: There is plenty of blame to go around. But leaving aside the banks’ risk management and bank supervisors’ apparent failures, there are deeper questions. Why did uninsured deposits grow so rapidly during the pandemic? Why are banks so heavily invested in long-term securities portfolios? Why are we seeing bank runs so soon after the Fed flooded the system with liquidity? Part of the answer lies in quantitative easing, a form of monetary … [Read more...]
Mortgage Market Not Expected to Settle Down Soon
The collapse of Silicon Valley Bank and Signature Bank has created volatility in mortgage markets, and according to Jennifer Hughes in the Financial Times, that volatility isn't expected to settle down overnight. She writes: The market volatility triggered by the failure of three banks in the past week has spooked traders in economically vital US mortgage-backed securities, leaving other lenders, usually important buyers, on the sidelines. The $11tn market for bundles of US home loans was already feeling the strain of last year’s soaring interest rates, which pushed up MBS spreads — the … [Read more...]
Were Silicon Valley Bank’s Motivations for Taking Losses Pure?
Below, the WSJ provides an account of how a plan hatched by Goldman Sachs to raise capital at Silicon Valley Bank (SVB) went south. What seems to be glossed over in this account and many others is SVB’s motivation for wanting to pull forward losses on a large portfolio of Treasury and agency mortgage-backed securities (MBS). Yes, SVB bought some longer-term bonds, and those bonds were held at an unrealized loss, but why recognize the losses all at once? The bank was apparently bleeding deposits, but there was no indication that the situation was unmanageable. What seems to be missed … [Read more...]
Major Rail Merger Gets Approval
A merger between rail giants Canadian Pacific and Kansas City Southern has been approved by regulators at the Surface Transportation Board. Esther Fung reports: A federal regulator has approved withconditions a merger between Canadian Pacific Railway Ltd. CP 6.23%increase; green up pointing triangle and Kansas City Southern, a $28 billion deal that would create the first freight rail network linking Canada, the U.S. and Mexico. “The merger is expected to offer more efficient and reliable service…and to improve the overall quality and availability of rail transportation services to the … [Read more...]
Credit Suisse Announced “Material Weaknesses” In Its Internal Controls
Owen Walker reports for the Financial Times that Credit Suisse has announced: “'material weaknesses' in its internal controls over financial reporting." Walker writes: Credit Suisse said it had identified “material weaknesses” in its internal controls over financial reporting, the latest blow to a bank battling to revive its fortunes. In its annual report on Tuesday, Credit Suisse said “management did not design and maintain an effective risk assessment process to identify and analyse the risk of material misstatements in its financial statements”. The bank said its full-year 2022 … [Read more...]
Is Deposit Insurance a Solution or a Problem?
In The Wall Street Journal, Charles W. Calomiris makes the case that deposit insurance encourages risky behavior and makes the banking industry less safe. He writes: Silicon Valley Bank’s failure makes many Americans grateful for deposit insurance, which protects accounts holding $250,000 or less. But the SVB episode also illustrates the dangers of deposit insurance. A banking system dominated by government insurance, plus too-big-to-fail protection that effectively insures all deposits at the largest banks, lacks essential market discipline, is systemically unsafe, is more likely to see … [Read more...]
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