References:
1 ) « Reserve requirements »:
Quote : In March 2020, the Fed slashed the reserve requirement to zero, meaning banks were not required to keep any cash on hand in reserve, so banks were prompted to increase loan activity.
Once the federal funds rate was cut to near zero, widespread lending activity soon ensued in the favorable borrowing environment. » in https://www.wallstreetprep.com/knowledge/reserve-requirements/#:~:text=In%20March%202020%2C%20the%20Fed%20slashed%20the%20reserve,activity%20soon%20ensued%20in%20the%20favorable%20borrowing%20environment .
2 ) «300 Billion Reasons Why SVB Contagion Is Spreading To The Broader Banking System », by Tyler Durden, Friday, Mar 10, 2023 – 12:22 PM, https://www.zerohedge.com/markets/300-billion-reasons-why-svb-contagion-spreading-broader-banking-system
(Quotes: a ) « For those who slept through yesterday, here is what you missed and why the US banking system is suffering its worst crisis since 2020. Silicon Valley Bank, aka SIVB, the 18th largest bank in the US with $212 billion in assets of which $120 billion are securities (of which most or $57.7BN are Held to Maturity (HTM) Mortgage Backed Securities and another $10.5BN are CMO, while $26BN are Available for Sale, more on that later )…»
b ) « For the answer we have to go all the way back to the immediate aftermath of the last financial crisis, when in early 2009 US regulators suspended Mark to Market, and instead of having banks hold debt securities on their books at price, they allowed them to split their asset holdings into two components: Available for Sale (or AfS), a bucket which would be marked to market and which could be sold to short up liquidity, and Held to Maturity (or HTM), a (far larger bucket) which allowed the banks to keep debt securities at cost. »
3 ) « Game Over: FDIC Shutters Silicon Valley Bank, Appoints Receiver », by Tyler Durden, Friday, Mar 10, 2023 – 11:10 AM, https://www.zerohedge.com/markets/silicon-valley-bank-crashes-65-halted-pending-news
Update (1135ET): Game over for Silicon Valley bank.
- *FDIC: SVB BANK CLOSED BY CALIFORNIA REGULATOR
- *FDIC: SVB BANK IS FIRST INSURED INSTITUTION TO FAIL THIS YEAR
- *FDIC CREATES A DEPOSIT INSURANCE NATIONAL BANK OF SANTA CLARA
- *FDIC: NAMED FEDERAL DEPOSIT INSURANCE FDIC AS RECEIVER
- *FDIC CREATES A DEPOSIT INSURANCE NATIONAL BANK OF SANTA CLARA
- *SILICON VALLEY BANK INSURED DEPOSITORS TO HAVE ACCESS MONDAY
As we noted before, while the FDIC noted that SVIB had $175BN in deposits as of Dec 31, note that some $151.5BN of these are uninsured, which means they get exactly zero although a sizable number of them likely pulled their deposits in the past few days.
And just like that SVB is no more: a historic collapse which in many ways was faster than Lehman, and which has seen SIVB stock plunge from $763 to 0 in 16 months.
4 ) « Silicon Valley Bank chiusa da autorità California per proteggere depositi », Storia di Redazione Tgcom24, 10 marzo 2023, https://www.msn.com/it-it/money/storie-principali/silicon-valley-bank-chiusa-da-autorit%C3%A0-california-per-proteggere-depositi/ar-AA18tu3Z?ocid=SL5MDHP&pc=SL5M&cvid=e460459aad9542ad945811054067061f&ei=7
Quote: « Grandi gruppi sono azionisti di Svb Alle spalle di Silicon Valley Bank ci sono anche grandi nomi. Il colosso della finanza Vanguard ha il 10,8%, State Street il 5,2%, Blackrock il 5% e Jp Morgan un altro 3,6%. Questo fallimento porta con sè un clima di incertezza su tutto il settore bancario tant’è vero che anche in Europa tutti gli istituti quotati hanno chiuso in calo. Ma non è tanto il crac di Svb a far paura quanto il campanello d’allarme che suona: potrebbe essere il primo segnale di un problema più serio legato al sistema creditizio? »
5 ) « “Expect Mass Layoffs…” – The Real-World Impact Of SVB’s Failure », by Tyler Durden, Friday, Mar 10, 2023 – 01:41 PM, https://www.zerohedge.com/markets/expect-mass-layoffs-real-world-impact-svbs-failure
Quick comment : This follows from the main contradiction already seen in the financial crisis at the end of September 2022 in the UK when Blackrock and others quickly divested from the English pension funds thus forcing the BoA to return to a QE mode while the government had to resign over the social part of the budget. The mess was the direct consequence of negative real interest rates going hand in hand with a foot-loose neoliberal social austerity enforced without the least qualms by global speculative capital. Except that now it is fast spreading to enterprises, big and small, and to venture capital.
1 ) The California bank relied heavily on uninsured deposits – inviting a bank run at the least sign of deterioration of its balance sheet.
2 ) It was heavily invested in Treasuries apparently without the proper hedging – this is deadly in the context of rising rates of interest because of the reverse relationship between rates and nominal value, the whole thing been aggravated by the cooked up books that officially emerged during the last big financial crisis, namely the opportunistic re-interpretation of « mark to market » into two entries « Available for Sale (or AfS), a bucket which would be marked to market and which could be sold to short up liquidity, and Held to Maturity (or HTM), a (far larger bucket) which allowed the banks to keep debt securities at cost. » (see Reference 2b above ).
3) Venture capital, otherwise known as risk capital. Recently the main depositors at the SVB were under trouble due to the aftermath of the lockdowns – supply chains disruption -, the economic slowdown and big layoffs in big tech enterprises including Google, Amazon, Twitter etc. These took their deposit away and the smaller depositors followed suite to avoid being the last guy on the sinking ship. A classic bank run situation. See : « https://techcrunch.com/2023/03/08/tech-industry-layoffs/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20v&guce_referrer_sig=AQAAAKxdV1mqRDCUnc-eKN0ldRQ08pJ_ZrfbNSnXaP_FzEyvIyNitSFHDFrjoU6aZ7bpZr4cfPf6zU_DU0j74QOBao99wBwFY8nyBj6aFiS4QOS23_xbRtYbHG9uRpmHVYUY9F7kv4y7DBkhhtIMLOfWecX051rrLGMsociDXid_BFb2 )
4 ) This chain of events quickly deteriorated the balance sheet of the California bank at a time when it already was under pressure because of the T bonds held to maturity while interest rates are going up.
5 ) Add to this, after the watering down of the loose Dodd-Frank, the March 2020 lunatic abolition of the Reserve Requirement by the FED. As we know after the 2007-2008 subprime crisis and the Fed’s bailout, QE and other liquidities de facto replaced the prudential ratio, thus destroying the sole cybernetic auto-regulation mechanism of capitalist finance embodied in the fractional system. (See : « Credit without collateral » and « The Treasury and the FED » in : https://www.la-commune-paraclet.com/EPIFrame1Source1.htm#epi )
This increased the cannibalizing effect of speculative finance over the real economy; worse still, it made the whole system incredibly fragile. This is starting to show now. The FED and other Central banks will be left to gather the pieces with ad hoc bailouts in an attempt to avoid a classic explosion of the CDS chains. (the Head of the US Treasury Ms Janet Yellen already announced such piecemeal interventions … with public money, in a way or another. See https://www.bloomberg.com/news/articles/2023-03-10/treasury-closely-watching-silicon-valley-bank-share-plunge )
In short the negative interest rates mess plus the zombie companies that now are going broke are destroying the balance sheets of the bank – add to this the intermingling between systemic and non systemic banks and funds – in this case with the Big NY banks …
This will also unfold shortly in Europe as the € 100 billion plus State guarantees in Italy, as well as in other States, that were granted during the Covid crisis, have to be repaid and many small and medium enterprises are going bankrupt because of the unbearable energy prices which destroy their costs of production. This is mainly due to speculation and to the organization of the single EU electricity market which operates on the basis of the price charged by the last plant called into production, which is not the marginal price but rather an administered technocratic-ecological EU beast. The last plant called usually burns costly imported gas. Add to this the prohibitive price of liquefied US shale gas which is 4 or 6 times more costly than Russian gas delivered through pipeline … Zombie companies are kept on the books as long as possible to protect the balance sheet. However, now many of them are simply going broke in the EU just like in the USA …
It does not end here: as enterprises increasingly go broke and unemployment increases – namely, the real unemployment rate goes up and the occupation rate goes down – demand falls and recession kicks in. Fiscal revenues – as well as social contributions – will be degraded while the public – and private – debt will shoot higher – if only because new government debt emissions are indexed and wages are not. This will mean lower taxes revenues and lower consumption. Meanwhile, the spread will rise up more thus forcing the ECB to intervene again – may be through the MES, perhaps with a slightly different name to assuage right-wing populists which feigned to oppose it until now !!! Think of Italy, here …
However, with some PCI oscillations, underlying inflation will continued to be sustained by the pressures caused by the Paris Accord, by financial speculation and by the EU single energy market. And because the inflation spiral will continue to rise, the central banks will be at a loss; not knowing what to do, they will be forced to continue raising interest rates in order to respect the textbook and to maintain a semblance of theoretical and operational legitimacy. That is, if they not are pushed by the blind and self-interested business world to finally apply the – truly idiotic – Taylor’s rule, but with a vengeance because of the time already lost !!! We will soon have recession together with high real but statistically masked unemployment and high interest rates, the all thing going hand-in-hand with creeping inflation. Time to change paradigm, see : http://rivincitasociale.altervista.org/the-pseudo-economic-science-of-the-bourgeoisie-here-is-why-we-should-quickly-change-economic-paradigm/
This is quite an unprecedented financial quagmire. The financial and neoliberal monetarist putative « masters of the world » are now paying for their unequalled arrogance allied with their unequalled intellectual nullity.
« Que la fête commence! »
Paul De Marco.
The contradictions of speculative capital and its road to hell, the case of SVB bank, March 10, 2023
Posted: 11th Marzo 2023 by rivincitasociale in Another America is possible, Commenti rapidi, EconomiaReferences:
1 ) « Reserve requirements »:
Quote : In March 2020, the Fed slashed the reserve requirement to zero, meaning banks were not required to keep any cash on hand in reserve, so banks were prompted to increase loan activity.
Once the federal funds rate was cut to near zero, widespread lending activity soon ensued in the favorable borrowing environment. » in https://www.wallstreetprep.com/knowledge/reserve-requirements/#:~:text=In%20March%202020%2C%20the%20Fed%20slashed%20the%20reserve,activity%20soon%20ensued%20in%20the%20favorable%20borrowing%20environment .
2 ) «300 Billion Reasons Why SVB Contagion Is Spreading To The Broader Banking System », by Tyler Durden, Friday, Mar 10, 2023 – 12:22 PM, https://www.zerohedge.com/markets/300-billion-reasons-why-svb-contagion-spreading-broader-banking-system
(Quotes: a ) « For those who slept through yesterday, here is what you missed and why the US banking system is suffering its worst crisis since 2020. Silicon Valley Bank, aka SIVB, the 18th largest bank in the US with $212 billion in assets of which $120 billion are securities (of which most or $57.7BN are Held to Maturity (HTM) Mortgage Backed Securities and another $10.5BN are CMO, while $26BN are Available for Sale, more on that later )…»
b ) « For the answer we have to go all the way back to the immediate aftermath of the last financial crisis, when in early 2009 US regulators suspended Mark to Market, and instead of having banks hold debt securities on their books at price, they allowed them to split their asset holdings into two components: Available for Sale (or AfS), a bucket which would be marked to market and which could be sold to short up liquidity, and Held to Maturity (or HTM), a (far larger bucket) which allowed the banks to keep debt securities at cost. »
3 ) « Game Over: FDIC Shutters Silicon Valley Bank, Appoints Receiver », by Tyler Durden, Friday, Mar 10, 2023 – 11:10 AM, https://www.zerohedge.com/markets/silicon-valley-bank-crashes-65-halted-pending-news
Update (1135ET): Game over for Silicon Valley bank.
As we noted before, while the FDIC noted that SVIB had $175BN in deposits as of Dec 31, note that some $151.5BN of these are uninsured, which means they get exactly zero although a sizable number of them likely pulled their deposits in the past few days.
And just like that SVB is no more: a historic collapse which in many ways was faster than Lehman, and which has seen SIVB stock plunge from $763 to 0 in 16 months.
4 ) « Silicon Valley Bank chiusa da autorità California per proteggere depositi », Storia di Redazione Tgcom24, 10 marzo 2023, https://www.msn.com/it-it/money/storie-principali/silicon-valley-bank-chiusa-da-autorit%C3%A0-california-per-proteggere-depositi/ar-AA18tu3Z?ocid=SL5MDHP&pc=SL5M&cvid=e460459aad9542ad945811054067061f&ei=7
Quote: « Grandi gruppi sono azionisti di Svb Alle spalle di Silicon Valley Bank ci sono anche grandi nomi. Il colosso della finanza Vanguard ha il 10,8%, State Street il 5,2%, Blackrock il 5% e Jp Morgan un altro 3,6%. Questo fallimento porta con sè un clima di incertezza su tutto il settore bancario tant’è vero che anche in Europa tutti gli istituti quotati hanno chiuso in calo. Ma non è tanto il crac di Svb a far paura quanto il campanello d’allarme che suona: potrebbe essere il primo segnale di un problema più serio legato al sistema creditizio? »
5 ) « “Expect Mass Layoffs…” – The Real-World Impact Of SVB’s Failure », by Tyler Durden, Friday, Mar 10, 2023 – 01:41 PM, https://www.zerohedge.com/markets/expect-mass-layoffs-real-world-impact-svbs-failure
Quick comment : This follows from the main contradiction already seen in the financial crisis at the end of September 2022 in the UK when Blackrock and others quickly divested from the English pension funds thus forcing the BoA to return to a QE mode while the government had to resign over the social part of the budget. The mess was the direct consequence of negative real interest rates going hand in hand with a foot-loose neoliberal social austerity enforced without the least qualms by global speculative capital. Except that now it is fast spreading to enterprises, big and small, and to venture capital.
1 ) The California bank relied heavily on uninsured deposits – inviting a bank run at the least sign of deterioration of its balance sheet.
2 ) It was heavily invested in Treasuries apparently without the proper hedging – this is deadly in the context of rising rates of interest because of the reverse relationship between rates and nominal value, the whole thing been aggravated by the cooked up books that officially emerged during the last big financial crisis, namely the opportunistic re-interpretation of « mark to market » into two entries « Available for Sale (or AfS), a bucket which would be marked to market and which could be sold to short up liquidity, and Held to Maturity (or HTM), a (far larger bucket) which allowed the banks to keep debt securities at cost. » (see Reference 2b above ).
3) Venture capital, otherwise known as risk capital. Recently the main depositors at the SVB were under trouble due to the aftermath of the lockdowns – supply chains disruption -, the economic slowdown and big layoffs in big tech enterprises including Google, Amazon, Twitter etc. These took their deposit away and the smaller depositors followed suite to avoid being the last guy on the sinking ship. A classic bank run situation. See : « https://techcrunch.com/2023/03/08/tech-industry-layoffs/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20v&guce_referrer_sig=AQAAAKxdV1mqRDCUnc-eKN0ldRQ08pJ_ZrfbNSnXaP_FzEyvIyNitSFHDFrjoU6aZ7bpZr4cfPf6zU_DU0j74QOBao99wBwFY8nyBj6aFiS4QOS23_xbRtYbHG9uRpmHVYUY9F7kv4y7DBkhhtIMLOfWecX051rrLGMsociDXid_BFb2 )
4 ) This chain of events quickly deteriorated the balance sheet of the California bank at a time when it already was under pressure because of the T bonds held to maturity while interest rates are going up.
5 ) Add to this, after the watering down of the loose Dodd-Frank, the March 2020 lunatic abolition of the Reserve Requirement by the FED. As we know after the 2007-2008 subprime crisis and the Fed’s bailout, QE and other liquidities de facto replaced the prudential ratio, thus destroying the sole cybernetic auto-regulation mechanism of capitalist finance embodied in the fractional system. (See : « Credit without collateral » and « The Treasury and the FED » in : https://www.la-commune-paraclet.com/EPIFrame1Source1.htm#epi )
This increased the cannibalizing effect of speculative finance over the real economy; worse still, it made the whole system incredibly fragile. This is starting to show now. The FED and other Central banks will be left to gather the pieces with ad hoc bailouts in an attempt to avoid a classic explosion of the CDS chains. (the Head of the US Treasury Ms Janet Yellen already announced such piecemeal interventions … with public money, in a way or another. See https://www.bloomberg.com/news/articles/2023-03-10/treasury-closely-watching-silicon-valley-bank-share-plunge )
In short the negative interest rates mess plus the zombie companies that now are going broke are destroying the balance sheets of the bank – add to this the intermingling between systemic and non systemic banks and funds – in this case with the Big NY banks …
This will also unfold shortly in Europe as the € 100 billion plus State guarantees in Italy, as well as in other States, that were granted during the Covid crisis, have to be repaid and many small and medium enterprises are going bankrupt because of the unbearable energy prices which destroy their costs of production. This is mainly due to speculation and to the organization of the single EU electricity market which operates on the basis of the price charged by the last plant called into production, which is not the marginal price but rather an administered technocratic-ecological EU beast. The last plant called usually burns costly imported gas. Add to this the prohibitive price of liquefied US shale gas which is 4 or 6 times more costly than Russian gas delivered through pipeline … Zombie companies are kept on the books as long as possible to protect the balance sheet. However, now many of them are simply going broke in the EU just like in the USA …
It does not end here: as enterprises increasingly go broke and unemployment increases – namely, the real unemployment rate goes up and the occupation rate goes down – demand falls and recession kicks in. Fiscal revenues – as well as social contributions – will be degraded while the public – and private – debt will shoot higher – if only because new government debt emissions are indexed and wages are not. This will mean lower taxes revenues and lower consumption. Meanwhile, the spread will rise up more thus forcing the ECB to intervene again – may be through the MES, perhaps with a slightly different name to assuage right-wing populists which feigned to oppose it until now !!! Think of Italy, here …
However, with some PCI oscillations, underlying inflation will continued to be sustained by the pressures caused by the Paris Accord, by financial speculation and by the EU single energy market. And because the inflation spiral will continue to rise, the central banks will be at a loss; not knowing what to do, they will be forced to continue raising interest rates in order to respect the textbook and to maintain a semblance of theoretical and operational legitimacy. That is, if they not are pushed by the blind and self-interested business world to finally apply the – truly idiotic – Taylor’s rule, but with a vengeance because of the time already lost !!! We will soon have recession together with high real but statistically masked unemployment and high interest rates, the all thing going hand-in-hand with creeping inflation. Time to change paradigm, see : http://rivincitasociale.altervista.org/the-pseudo-economic-science-of-the-bourgeoisie-here-is-why-we-should-quickly-change-economic-paradigm/
This is quite an unprecedented financial quagmire. The financial and neoliberal monetarist putative « masters of the world » are now paying for their unequalled arrogance allied with their unequalled intellectual nullity.
« Que la fête commence! »
Paul De Marco.