Is the US banking sector headed towards another 2008-like crisis?
Signs of contagion are emerging with regional banks collapsing and financial markets in panic.
Here's what you need to know
🧵:
Signs of contagion are emerging with regional banks collapsing and financial markets in panic.
Here's what you need to know
🧵:
2/ Silicon Valley Bank collapsed due to liquidity issues
US financial markets are in panic due to signs of a banking crisis emerging for the first time since 2008
US financial markets are in panic due to signs of a banking crisis emerging for the first time since 2008
3/ We’re seeing signs of contagion to other US regional banks
$KRE, a regional bank ETF, has been collapsing due to fears the crisis will spill over to other regional banks
It is down 30% in just 2 days
$KRE, a regional bank ETF, has been collapsing due to fears the crisis will spill over to other regional banks
It is down 30% in just 2 days
4/ Why are we having a banking crisis?
Because of excess leverage in the system
This chart shows the leverage ratio of the US banking sector, i.e. institutions’ exposure to risk
Elevated leverage has systematically led to a banking crisis: 1929, 2008, and today
Because of excess leverage in the system
This chart shows the leverage ratio of the US banking sector, i.e. institutions’ exposure to risk
Elevated leverage has systematically led to a banking crisis: 1929, 2008, and today
5/The inverted yield curve predicts a recession and hard landing due to the Fed's record monetary tightening
At the risk of being redundant, this indicator has a perfect track record in anticipating hard landings
At the risk of being redundant, this indicator has a perfect track record in anticipating hard landings
6/ The aggressive tightening cycle and highly leveraged banking sector create a formula for bank blowups
7/ SVB's low-yield deposits became less attractive as interest rates rose, leading to customers withdrawing their deposits
In response, SVB sold their long-term bonds at a significant loss, which led to more withdrawals
and ultimately a bank run
In response, SVB sold their long-term bonds at a significant loss, which led to more withdrawals
and ultimately a bank run
8/ Fractional reserve lending underpins the whole banking system
Historically, when you deposit $1000 in a bank, the bank is allowed to keep only $100 and lend out the rest
Since 2020, banks can lend out the entire $1000 deposit as the reserve requirement has been reduced to 0
Historically, when you deposit $1000 in a bank, the bank is allowed to keep only $100 and lend out the rest
Since 2020, banks can lend out the entire $1000 deposit as the reserve requirement has been reduced to 0
9/ If all depositors withdraw their funds, the bank will go bankrupt
This is what you call a bank run, and it is what happened with SVB
Depositors withdrew their investments in the panic of the collapse
This is what you call a bank run, and it is what happened with SVB
Depositors withdrew their investments in the panic of the collapse
10/ This is what would have happened to the rest of the banking sector if the Fed didn't intervene
We were one bad decision away from a full-blown financial crisis
We were one bad decision away from a full-blown financial crisis
11/ Signature Bank, First Republic Bank, and Comerica bank all dropped significantly in just three days, with losses of 40%, 80%, and 50% respectively
The bank run was spreading rapidly throughout the financial system
The bank run was spreading rapidly throughout the financial system
12/ Investors are viewing regional banks as riskier than too-big-to-fail banks like JP Morgan and BOA
$KRE (regional bank ETF) is substantially underperforming $XLF as depositors are moving to larger banks for greater protection guarantees
$KRE (regional bank ETF) is substantially underperforming $XLF as depositors are moving to larger banks for greater protection guarantees
13/ The panic can only be stopped if the Fed intervenes aggressively
Federal regulators now insure all SVB deposits, calming the situation
However, if the bank run persists, the Fed may need to intervene more strongly
Just like it did in March 2020
Federal regulators now insure all SVB deposits, calming the situation
However, if the bank run persists, the Fed may need to intervene more strongly
Just like it did in March 2020
14/ In 2020, inflation was almost non-existent though, while it is currently at 6%, which poses a significant challenge for the economy
This hinders the Fed's ability to intervene as it did 3 years ago, and investors know this, making the panic much more difficult to calm down
This hinders the Fed's ability to intervene as it did 3 years ago, and investors know this, making the panic much more difficult to calm down
15/ A run on regional banks could have major repercussions on the economy, so it should not be underestimated
This network finances local businesses that drive the economy
This network finances local businesses that drive the economy
16/ In 2008, bank failures were a precursor to rising unemployment and financial crisis
Although systematic risks are lower now than in 2008, the current set up appears similar.
Although systematic risks are lower now than in 2008, the current set up appears similar.
17/ In the short term, regulators' decisive response and lower Fed rate hike expectations could lead to a market relief rally.
We’ll be using any relief rally as an opportunity to increase the defensiveness of our Model Portfolio at gameoftrades.net
We’ll be using any relief rally as an opportunity to increase the defensiveness of our Model Portfolio at gameoftrades.net
18/ We had high cash, treasury bond, and gold allocations, as well as a VIX call, which helped our members outperform the market during the recent turmoil
Get a free trial at gameoftrades.net to stay updated as we navigate the current macro environment
Get a free trial at gameoftrades.net to stay updated as we navigate the current macro environment
19/ Thanks for reading!
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