Demonstrative competence is high in demand in a trust-based financial system. The post Yellen Calls Unscheduled FSOC Meeting Amid Banking Turmoil appeared first on Tokenist.
What is the monetary framework available to these institutions?
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A Brewing Financial Crisis
- Chair of the Council (Treasury Secretary)
- Chairman of the Federal Reserve System
- Comptroller of the Currency
- Director of the Consumer Financial Protection Bureau
- Chairman of the Securities and Exchange Commission
- Chairperson of the Federal Deposit Insurance Corporation
- Director of the Federal Housing Finance Agency
- Chairman of the National Credit Union Administration Board
- Independent member with insurance expertise appointed by the President and confirmed by the Senate
- Independent member with financial market expertise appointed by the President and confirmed by the Senate.
Although the FSOC meeting was closed, as it addressed the delicate nature of fractional reserve banking, what framework can contain the banking contagion?
Why Did the Banking Crisis Begin?
“Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”
In turn, the bond’s yield decreases as a return on investment. Concurrently, this leads to the bank’s overall asset value decline. Unfortunately, Silicon Valley Bank lacked a hedge against this exposure risk, such as interest rate swaps and a more diversified portfolio.
This could be because SVB lacked a Chief Risk Officer (CRO) for eight months following the departure of Laura Izurieta last April.
What is the FDIC’s Capacity to Contain Contagion?
“Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.”
This is the essence of the ‘fiat’ system, running on the concept of trust. If that trust is eroded, such a system becomes exceedingly fragile. In the aforementioned paper, researchers point to even small turbulence as sufficient kindling.
“If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk.”
Seeing the encroaching danger, hedge fund billionaires like Bill Ackman are urging the authorities to go to unprecedented measures to make all deposits implicitly guaranteed, which Yellen implicitly hinted at.
This is also why Yellen’s fumbling, through incoherent position reversals, has such a high volatility potential. Even if the US Treasury does not intend to provide “blanket insurance,” as Yellen noted on Wednesday, saying so would be powerful in a system run on governed trust.
Of course, when push comes to shove, the Federal Reserve can digitally print infinite amounts of money to backstop everything, but that would only lead to hyperinflation.
Do you think the US banking uncertainty parallels increased efforts to dismantle fiat-to-Bitcoin rails? Let us know in the comments below.