The banking crisis is shifting rapidly and it’s fluid due to the complex and interconnected global financial system. This update will likely outdate itself by this weekend or next week as the drama unfolds. I began this series by penning a summary of what occurred during the Great Financial Crisis (GFC) in Part 1 (Twitter thread) with the opening salvo:
“It’s been quite a weekend we just experienced that’s a memory lane Déjà Vu (video) for me if juxtaposed against the slow-roll trainwreck known as the GFC when I occupied a cubicle with a risk management team in NYC.” – TraderStef, Mar. 14
Systemic banking behemoths like TBTF Deutsche Bank is the largest bank in Germany and among the top ten in Europe, which is a critical cog for international banking that succumbed to contagion pressure this week. While observing how the extended banking family has reacted to the SVB hangover, Credit Suisse/UBS’ shotgun wedding deal with a bail-in last weekend rumored to be falling apart, commentary by Goldilocks pundits, banker happy talk, and the Fed doubling down on QT market risk this week, it’s all a distant memory that morphed into a crisis of confidence and liquidity amidst fear of a derivatives driven “great credit unwind” and CDS market chaos that’s signaling additional pain in the pipeline. As a side note, the fear factor surrounding this banking crisis has incited a resurgence of “huge demand” for gold and silver bullion and government minted coins.
FED’S BOSTIC: CONVINCING INDICATIONS THAT THE BANKING SYSTEM IS SECURE AND RESILIENT – FED’S BULLARD: THERE IS AN 80% CHANCE THAT FINANCIAL STRESS WILL EASE AND FOCUS WILL RETURN TO INFLATION – ECB’S LAGARDE: TELLS EU LEADERS EURO AREA BANKING SECTOR STRONG, ECB FULLY EQUIPPED TO PROVIDE LIQUIDITY TO EURO AREA FINANCIAL SYSTEM, IF NEEDED – Mar. 24
Deutsche Bank shares slide 14% after sudden spike in the cost of insuring against its default… “The emergency rescue of Credit Suisse by UBS, in the wake of the collapse of U.S.-based Silicon Valley Bank, triggered contagion concern among investors, which was deepened by further monetary policy tightening from the U.S. Federal Reserve on Wednesday. Deutsche Bank shares fell by more than 14% on Friday following a spike in credit default swaps (CDS) Thursday night, as concerns about the stability of European banks persist… Deutsche Bank’s additional tier-one (AT1) bonds — an asset class that hit the headlines this week after the controversial write-down (aka bail-in) of Credit Suisse’s AT1s as part of its rescue deal — also sold off sharply… Deutsche led broad declines for major European banking stocks… ‘However, in an uncertain economic environment and with investor confidence remaining fragile, there is a risk that policymakers will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector,’ Moody’s ratings agency’s credit strategy team said. ‘Even before bank stress became evident, we had expected global credit conditions to continue to weaken in 2023 as a result of significantly higher interest rates and lower growth, including recessions.’” – CNBC
As Northman Trader astutely pointed out on Wednesday, a Fed’s deer in headlights moment appeared when Jay Powell was left speechless for a few seconds during Q&A at the FOMC presser. That pertinent but fleeting moment was prompted by Bloomberg journo Catarina Saraiva when she asked Jay to clarify if the Fed’s San Francisco board was aware of the escalation that led to SVB’s sudden implosion. Here is a full version of the presser, but only view timestamp 31:47 to 33:55 and focus on the last twelve seconds that drives home the point:
Rick Santelli at CNBC rarely parses his opinions on live TV, and this morning was no exception while he opined on a durable goods report that tanked in February, Fed monetary policy and interest rates, the banking crisis, and recession. In the following clip, remarks beginning at timestamp 1:34 tells the tale:
“Dear Central Banks – When you see suppress the true, market driven cost of capital for longer and longer periods of time. You incentivize the hold to maturity (HTM) yield reach across the banking system. Then you juice rates 500bps in 13 months to ‘fight’ inflation and light it all on fire.” – Larry McDonald
Larry McDonald: SVB brought more attention to banks – CNBC
Ex-Fed board member: Powell deep in ‘monetary madness’ – Fox Business
The dominant financial news today was broad-based. The Fed’s FIMA Repo facility maxed out with an unprecedented surge for dollar liquidity by a foreign central bank (presumably in Europe) that’s likely not covered by the Fed’s swap line facility, banks have ramped up usage of the Fed’s new Bank Term Funding Program (BTFP), there was extreme volatility in Europe’s banking sector stocks as the U.S. regional banking ETF $KRE flirts with the pandemic panic lows of 2020, CDS derivative premiums for Deutsche Bank credit risk went through the roof, and Janet Yellen cocked a ghost gun trigger by convening a closed-door emergency meeting with the Financial Stability Oversight Council. Moments ago, they announced the U.S. banking system remains “sound and resilient.”
Memories of 2017 when Yellen declared there would be “no new financial crisis in our lifetimes” is certainly fresh in everyone’s mind that can set the stage for making her the fall gal. But rest assured because the financial lords didn’t see a crisis before the GFC accelerated in 2008, the Fed’s models are always way off the mark, the “most vulnerable” U.S. banks have lost $1 trillion in deposits since last year and could accelerate despite Fed’s assurances, and everything is rainbows and Goldilocks after today’s market close when Biden said U.S. “banks are in pretty good shape.”
“Europe’s Milton Friedman moment is now upon us. Deutsche Bank’s price to insure against default is skyrocketing today. DB is one of the world’s 30 most systemically important banks (G-SIFIs). Here’s the problem for the Euro itself: Germany’s three largest banks ALREADY HAVE 97% of banking assets (in the US, it’s 35%). If you are a U.S. lawmaker, pay attention here. The FED just lent (via Repo) the statutory limit ($60 billion USD) to an ‘unreported foreign sovereign’ (think Germany). With complete deposit concentration, it’s likely the deposits will run to a safer foreign jurisdiction. Deutsche Bank is too big to fail AND possibly too big to save. What can the ECB do? Does it have the same resources and power the FED has? It doesn’t. Post the GFC, the majority of European banks never recapitalized themselves because there are still national identities today in Europe. No centralized power, no centralized taxing authority, and therefore not a ‘real’ union. We could be witnessing the beginning of the end of the EMU.” – Kyle Bass
I suggest you keep a daily screenshot of all balance summaries from banks you do business with in case a bail-in knocks at your door, have enough cash on hand for a month’s worth of expenses, and keep the food pantry and financial house in order. Let’s close up shop this week with an overview by former Blackrock analyst Edward Dowd.
‘Emergency’ Fed rate cut by June, only 6 U.S. banks will be left by 2025 – Ed Dowd, Mar. 24
Headline Collage Art by TraderStef