Probability (FDIC guarantees all $20 Trillion in deposits --> High inflation continues) = ?

[LearningMachine]

32 minutes ago, TwoCitiesCapital said:

I think there should be two separate tiers of FDIC insurance. 

 

The current 250k limit is probably good for retail/individual accounts. 

 

Then there needs to be a higher tier limit for larger accounts that is significantly larger and charges an additional surcharge fee for the additional insurance. 

 

It's crazy to think corporations and individuals are bank experts enough to do due diligence on the solvency/liquidity of banks before depositing with them. Separately, it's also crazy to think that corporations would do that due diligence on thousands of separate entities to keep below 250k at each. 

 

Allow for higher FDIC limits and CHARGE extra for it on those specific accounts. 

 

FDIC currently charges assessments based on "total liabilities, not just insured deposits." See https://www.fdic.gov/resources/deposit-insurance/deposit-insurance-fund/dif-assessments.html .  You're probably right they might make more adjustments to it. 

 

$128B balance that FDIC currently has might not be enough to plug more bank failures. See https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-quarterly/index.html .

 

Increased assessments are not going to come in right away.  So, FDIC is going to need to get the money from treasury printing it using some mechanism somehow for now, and maybe some of it gets paid back through assessments in the future to assure the taxpayers that they are not funding it.  Maybe Treasury/Fed could lend to FDIC at no interest to give FDIC & banks some benefit that doesn't trigger political issues for democrats. 

 

 

Edited March 19, 2023 by LearningMachine

[SHDL]

The SVB and Signature Bank deposit guarantees are financed by a "special tax" on banks (if needed), so assuming they do the same with a broader deposit guarantee I don't expect that to be inflationary. 

[Gregmal]

I also think we ve seen enough that these imagined dollars of printing that simply stay within the banking system haven’t created an ounce of inflation. It’s the ones they send to average folks. Guaranteeing people simply have access to money they put in a savings account really won’t do anything be ease much of this social media driven panic. 

[Sweet]

39 minutes ago, Gregmal said:

I also think we ve seen enough that these imagined dollars of printing that simply stay within the banking system haven’t created an ounce of inflation. It’s the ones they send to average folks. Guaranteeing people simply have access to money they put in a savings account really won’t do anything be ease much of this social media driven panic. 

 

It’s like everybody just found out that banks don’t always hold all the cash necessary to cover every deposit, and that some deposits are not insured.

 

None of this is new information but it has caused a freak out.
 

It’s potential problem that some banks are sitting in large mark to market losses but that’s only a problem if deposits are rapidly pulled.

 

[vinod1]

This is the Great Imaginary Financial Crisis (GIFC) of 2023. 

 

It seems a lot of people just realized that bond yields and bond price are inversely related and particularly this seems like a magical revelation among the tech bros.

 

Banks are in good shape. As always, any bank that has a run will collapse. If a bank has a run and still does not collapse, it is doing something wrong.

 

If we are going to have financial drama, I am all for it. 

 

 

 

Edited March 20, 2023 by vinod1

[mcliu]

Agreed! Seems like banking is one of those areas where an imaginary crisis can create a real crisis though..

 

I think the headache here is creating the incentives for people to stay in their regional/local banks when there are TBTF banks. It's extra difficult when you have an inverted yield curve and very high short-term rates.

[Spekulatius]

32 minutes ago, mcliu said:

Agreed! Seems like banking is one of those areas where an imaginary crisis can create a real crisis though..

 

I think the headache here is creating the incentives for people to stay in their regional/local banks when there are TBTF banks. It's extra difficult when you have an inverted yield curve and very high short-term rates.

Banking or any to get financial has a high degree of reflexivity attached to it. That means that perception can very well become reality. Or in other words, as long as people believe banks are stable, then they are stable - if people don’t trust the banks, they will become very fragile.

 

There simply isn’t a bank that can withstand a 50% drawdown of deposits. I think almost no bank is designed to withstand such a drawdown.

 

As for inflation - any crisis of banking system is deeply  recessionary and deflationary. Bank now will have to increase their liquify buffer to withstand bank runs better which means less lending. I don’t  really see anything remotely inflationary in the current development, unless LT interest rates go down so much, that the ~$4.4T in securities held by banks that are currently underwater go to par again and everyone continues as if nothing has happened.

Edited March 20, 2023 by Spekulatius

[Valuebo]

Afraid I agree with Spek here and that view has definitely changed over last few days. I expected market to remain more rational, silly me!

 

All said and done this weekend was sad to witness. Market working against it's own best interests despite - hopefully at least - rationally knowing things are far better and more robust than GFC. Just feels like we will need a serious washout here with firesale prices. Market gonna snif things out until it hits a clear wall because the fear is too absurd versus fundamentals. Too many potential dominos now considering uncertainty of deposit flows in and lackluster appetite for regional  banks. FED is fucked as they can't signal more angst and should likely rise 25 bps and leave no guidance. 

[dpetrescu]

I don’t think Buffett is buying any bank. There is a similarity here to airlines in 2020 - the entire small and medium bank industry is waiting for more and more bailouts of some kind. 
 

How would it look if Buffett buys a few regional banks and two days later Biden announces FDIC support for all 20T deposits?

[sleepydragon]

10 hours ago, Spekulatius said:

Banking or any to get financial has a high degree of reflexivity attached to it. That means that perception can very well become reality. Or in other words, as long as people believe banks are stable, then they are stable - if people don’t trust the banks, they will become very fragile.

 

There simply isn’t a bank that can withstand a 50% drawdown of deposits. I think almost no bank is designed to withstand such a drawdown.

 

As for inflation - any crisis of banking system is deeply  recessionary and deflationary. Bank now will have to increase their liquify buffer to withstand bank runs better which means less lending. I don’t  really see anything remotely inflationary in the current development, unless LT interest rates go down so much, that the ~$4.4T in securities held by banks that are currently underwater go to par again and everyone continues as if nothing has happened.

imo, banks will pull back from lending and PE firms will under pressure. Berkshire will have permanent cash get to do a lot of deals . Obvious even to me

[james22]

Whatever BRK does, it will be with insider knowledge.

 

That's helpful.