This article is not about Silicon Valley Bank.
It’s about what happens next.
Banks are starving for liquidity. Silicon Valley Bank was just the first bank to face its stark choices: hide and starve – or join the hunt and risk attack by other hunters.
Mobile Banking & Trading Apps Make it Easy to Hunt the Weak
Today, financial hunger games are happening at Twitter speed with instant market access.
Mobile banking and trading apps allow everyone to hunt the weak, much as vultures swarm a carcass. Hunters are organizing now to short stocks, attack bondholders, and capture deposits.
The Federal Reserve and US Treasury are indeed aware of the dangers to the banking system. Unfortunately, they are slow and lack the necessary tools to adequately confront the market hunters directly.
What Happens Next in the Financial Hunger Games?
Create a media distraction.
Drawing the public’s eye away from the financial markets long enough will allow some immediate and painful changes without causing a stampede.
Arresting former president Donald Trump makes a great distraction, doesn’t it?
Then what? Well, let’s see…
- Corral the strongest of the weak banks and protect them with liquidity injections from larger banks that have direct access to Federal Reserve liquidity.
- Make any attack too expensive for the hunters. First bank saved is First Republic Bank, receiving $30 billion from JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Truist. There will be many more rescues to come: some will be quiet, while others will be loud, depending on the need to affect herd mentality.
- Shoot the wounded banks. Force an organized liquidation before the hunters taste blood. Banks deemed too weak to protect will be liquidated. This will occur through acquisitions, receivership, and bankruptcies. All merger and acquisitions currently held in Senator Warren’s regulatory prison will be set free. Look to see TD Bank’s acquisition of First Horizon Bank approved quickly. M&A is back on the menu.
- Bondholders be damned! The Federal Reserve will continue to raise interest rates, sucking liquidity from markets worldwide.
Stock and bond markets, and other central banks will quickly realize that the Federal Reserve is no longer the shining white knight. The US Treasury market is the only market the Federal Reserve will protect. Expect the US Treasury to yield curve control to manage government debt interest payments – while interest rates are rising, and inflation is raging.
The Real, Ongoing Threats to the US Banking System
New weapons take time to craft and become institutionalized.
Social media at Twitter speed is a real ongoing threat to the US banking system. Expect requests for new regulatory abilities, tools, and authority to be proposed, negotiated, and funded.
It is often said that The Hunger Games could never happen. Alas, let me remind you, they already did. We know it by the name of the ancient Roman Empire. And indeed, Suzanne Collins, author of The Hunger Games, confirmed she modeled the story on Rome.
Let me remind you again: the Financial Hunger Games have happened many times.
Banks Play a Confidence Game
Simply speaking, banks play a confidence game, taking in short term deposits (liabilities) to create long term loans (assets). By design, banks never have enough cash on hand to cover all depositors. A classic bank run, like Silicon Valley Bank, is when depositors’ lose confidence and withdraw their money.
Shortly after the Silicon Valley Bank failure became national news, my local TV station ran a very quaint onsite interview with a local bank president, in an attempt to give confidence to local depositors. A special effort was made to show no local banks had lines of customers. (But wait…I haven’t seen a line at any bank in decades).
Financial Hunger Games: A Timeline History
Before the US Civil War, all bank runs were local. Broad panic took months, even years, to unfold.
Why? Simple. In those days, news traveled by foot, horse or sail – not by digital means at warp speeds.
1873 –
Telegraph and railroads expanded across the country in tandem, delivering news between cities within weeks. The speed of the Panic of 1873 caught the nation by surprise. Within days, the whole nation was aware of railroad bond defaults and bank insolvencies. Known as the long depression, it took decades for liquidity to return to the system. Back then, there was no Federal Reserve or FDIC.
1907 –
Telephone connections between businesses within cities was common. When the Panic of 1907 started, the speed at which businesses took money out of banks stunned everyone.
It took the financial might of JP Morgan to intercede with enough liquidity to stop the panic. The Federal Reserve Bank was created in 1913 specifically to stop another 1907 panic. Acting as a bankers’ bank, the Federal Reserve could quickly provide liquidity by purchasing bank assets. Confidence was restored to the banking industry.
1929 –
Radio delivered information to everyone at the same time. Businesses no longer had an advantage of getting ahead of the crowd. By 1929, mass communications created herd movements and stampedes, and on Black Monday the stock market crashed – within moments, bank runs occurred in every major city.
Banks and the Federal Reserve could not inject liquidity quick enough and the Great Depression began. The Federal Depositors Insurance Corporation (FDIC) was created in 1933 specifically to stop herd withdrawal, providing assurance to customers that all smaller depositors were safe and to suppress any future herd stampedes. Confidence was restored.
2008 –
Online banking and social media were still not broadly adopted when the 2008 great financial crisis occurred. Although news moved fast, the Federal Reserve and FDIC were able (by extraordinary efforts), to restore confidence. QE, NIRP, ZIRP and other fun acronyms were employed to inject liquidity directly into market.
2023 –
Welcome to the digital age: Twitter speed & mobile apps are what we are experiencing now. The tools used in the 2008 financial collapse will not suffice under these circumstances. Additionally, dangers are even more acute with the ongoing war in Europe, national sanctions, de-globalization and de-stabilization.
A look at history tells us: what is, has been before.
Recommended Reading References:
Dark Forest: The Brutal Game of Modern Banking. By Ben Hunt, Epsilon Theory 3/15/23
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