Reserve

<div class="textg" style="text-align: justify; font-weight: lighter; line-height: 1.3em; font-size: 15px; border-radius: 3px; color: #80909a; padding: 10px; background-color: #F4F6F9; margin-bottom: 15px;">Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our&nbsp;<a href="https://tokenist.com/terms-of-service/" style="text-decoration:underline;color:#3c7b7b" target="_blank" rel="noreferrer noopener" class="deco-link">website policy</a>&nbsp;prior to making financial decisions.</div>



<p class="has-drop-cap">Early Friday, the US Treasury Department <a href="https://www.reuters.com/markets/us/yellen-chairs-closed-us-financial-stability-oversight-council-meeting-2023-03-24/" target="_blank" aria-label="convened (opens in a new tab)" rel="noreferrer noopener nofollow" class="deco-link">convened</a> an unscheduled and closed meeting of the Financial Stability Oversight Council. Established in the aftermath of the <a href="https://tokenist.com/us-banks-borrowed-148b-from-feds-discount-window-this-week-highest-level-since-2008/" rel="dofollow" class="deco-link">2008 Great Financial Crisis</a>, the FSOC’s impromptu gathering again fuels the fire of banking contagion.</p>



<p>What is the monetary framework available to these institutions?</p>



<h3 id="a-brewing-financial-crisis">A Brewing Financial Crisis</h3>



<p>US Treasury Secretary Janet Yellen has been on a media tour this week. On Wednesday, before the Senate Appropriations Committee, Yellen committed a big blunder. She <a aria-label="stated (opens in a new tab)" href="https://www.business-standard.com/article/international/us-not-considering-blanket-bank-deposit-insurance-treasury-secy-yellen-123032300136_1.html#:~:text=%E2%80%9CI%20have%20not%20considered%20or,if%20smaller%20lenders%20are%20threatened." target="_blank" rel="noreferrer noopener nofollow" class="deco-link">stated</a>, “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits.”</p>



<p>This contradicted Yellen’s <a href="https://www.reuters.com/markets/us/treasurys-yellen-says-committed-protecting-bank-deposits-more-actions-may-be-2023-03-21/" target="_blank" aria-label="statement (opens in a new tab)" rel="noreferrer noopener nofollow" class="deco-link">statement</a> on Tuesday before the American Bankers Association, saying that “similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”</p>



<p>A week prior, Yellen <a href="https://www.youtube.com/watch?v=IbxixeyGG3E" target="_blank" aria-label="said (opens in a new tab)" rel="noreferrer noopener nofollow" class="deco-link">said</a> Americans “can feel confident” about their deposits. As one would expect, this messaging clash caused stock market turmoil. </p>


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<figure class="aligncenter size-large"><img decoding="async" width="1024" height="571" src="https://tokenist.com/wp-content/uploads/2023/03/Fr3NimFWIAAZPc5-1024x571.jpg" alt="" class="wp-image-146500" srcset="https://tokenist.com/wp-content/uploads/2023/03/Fr3NimFWIAAZPc5-1024x571.jpg 1024w, https://tokenist.com/wp-content/uploads/2023/03/Fr3NimFWIAAZPc5-300x167.jpg 300w, https://tokenist.com/wp-content/uploads/2023/03/Fr3NimFWIAAZPc5-768x428.jpg 768w, https://tokenist.com/wp-content/uploads/2023/03/Fr3NimFWIAAZPc5-1536x856.jpg 1536w, https://tokenist.com/wp-content/uploads/2023/03/Fr3NimFWIAAZPc5-650x362.jpg 650w, https://tokenist.com/wp-content/uploads/2023/03/Fr3NimFWIAAZPc5-646x360.jpg 646w, https://tokenist.com/wp-content/uploads/2023/03/Fr3NimFWIAAZPc5.jpg 1808w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption class="wp-element-caption"><em>Image credit: Bloomberg via @Schuldensuehner</em></figcaption></figure></div>


<p>On Thursday, Yellen’s modified remark reverted to the previous stance: &#8220;<a aria-label="we would be prepared to take additional actions if warranted (opens in a new tab)" href="https://www.cnbc.com/2023/03/23/yellen-says-treasury-is-ready-to-take-additional-actions-if-warranted-to-stabilize-banks.html" target="_blank" rel="noreferrer noopener nofollow" class="deco-link">we would be prepared to take additional actions if warranted</a>.” One example would be the coordinated effort to inject up to $70 billion in liquidity into the <a href="https://tokenist.com/first-republic-bank-down-47-as-search-for-buyer-continues/" rel="dofollow" class="deco-link">First Republic Bank</a>.</p>



<p>Following the gaffe-correcting measure, Yellen summoned an unscheduled and closed-doors Financial Stability Oversight Council (FSOC) meeting on Friday. Established in 2010 as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, FSOC consists of <a href="https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/about-fsoc" target="_blank" aria-label="10 voting members (opens in a new tab)" rel="noreferrer noopener nofollow" class="deco-link">10 voting members</a> hailing from these governmental bodies:</p>



<ol>
<li>Chair of the Council (Treasury Secretary)</li>



<li>Chairman of the Federal Reserve System</li>



<li>Comptroller of the Currency</li>



<li>Director of the Consumer Financial Protection Bureau</li>



<li>Chairman of the Securities and Exchange Commission</li>



<li>Chairperson of the Federal Deposit Insurance Corporation</li>



<li>Director of the Federal Housing Finance Agency</li>



<li>Chairman of the National Credit Union Administration Board</li>



<li>Independent member with insurance expertise appointed by the President and confirmed by the Senate</li>



<li>Independent member with financial market expertise appointed by the President and confirmed by the Senate.</li>
</ol>



<p>Although the FSOC meeting was closed, as it addressed the delicate nature of fractional reserve banking, what framework can contain the banking contagion?</p>


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<h3 id="why-did-the-banking-crisis-begin">Why Did the Banking Crisis Begin?</h3>



<p>In 2012, the current Fed Chair, Jerome Powell, was just a member of the Fed Board of Governors. At that time, he <a href="https://www.spglobal.com/marketintelligence/en/news-insights/trending/ubf9xh7zji4ehxlhrwghmg2" target="_blank" aria-label="wrote  (opens in a new tab)" rel="noreferrer noopener nofollow" class="deco-link">wrote </a>this:</p>



<blockquote class="wp-block-quote">
<p><em>“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.”</em></p>
</blockquote>



<p>This is one of the underlying reasons why <a href="https://tokenist.com/bitcoin-up-9-5-amid-banking-crisis-in-us-breaks-through-24000/" rel="dofollow" class="deco-link">Silicon Valley Bank went under</a>. As the Fed started raising interest rates, the value of fixed-income securities, such as bonds (government debt), decreased. After all, the bond’s coupon rate becomes less attractive than the newly issued ones in a higher interest rate regime.</p>



<p>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. </p>



<p>This could be because SVB lacked a Chief Risk Officer (CRO) for eight months following the departure of Laura Izurieta last April.</p>



<p>But regardless of this fact, the Federal Reserve seems to expect something to break as a mechanism “to result in tighter credit conditions for households and businesses,” as noted by Powell at <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230322.pdf" target="_blank" rel="nofollow">Wednesday’s press conference</a>.</p>


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<h3 id="what-is-the-fdic-s-capacity-to-contain-contagion">What is the FDIC’s Capacity to Contain Contagion?</h3>



<p>The US banking system holds around $17 trillion in deposits, according to the latest <a aria-label=" (opens in a new tab)" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676" target="_blank" rel="noreferrer noopener nofollow" class="deco-link">academic paper on banking fragility</a>. Of that amount, $7 trillion remains uninsured by the FDIC’s $250k threshold standard or 41.18%.</p>



<blockquote class="wp-block-quote">
<p><em>“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.”</em></p>
</blockquote>



<p>Due to the <a href="https://tokenist.com/will-the-fed-shift-monetary-policy-amid-a-banking-crisis/" rel="dofollow" class="deco-link">fastest hiking cycle</a> in recent history, to combat inflation resulting from the Fed’s +39% M2 money supply increase, US banks’ assets declined by ~10% in value. As of December 31, 2022, FDIC reported having just $128.2 billion. This means that FDIC can only ensure 1.28% of $10 trillion in insured deposits.</p>



<p>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.</p>



<blockquote class="wp-block-quote">
<p><em>“If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk.”</em></p>
</blockquote>



<p>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.</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="500" data-dnt="true"><p lang="en" dir="ltr">Yesterday, <a href="https://twitter.com/SecYellen?ref_src=twsrc%5Etfw" target="_blank" rel="nofollow">@SecYellen</a> made reassuring comments that led the market and depositors to believe that all deposits were now implicitly guaranteed. That coupled with a leak suggesting that <a href="https://twitter.com/USTreasury?ref_src=twsrc%5Etfw" target="_blank" rel="nofollow">@USTreasury</a>, <a href="https://twitter.com/FDICgov?ref_src=twsrc%5Etfw" target="_blank" rel="nofollow">@FDICgov</a> and <a href="https://twitter.com/SecYellen?ref_src=twsrc%5Etfw" target="_blank" rel="nofollow">@SecYellen</a> were looking for a way to guarantee all deposits reassured… <a href="https://t.co/GqaP5LYpza" target="_blank" rel="nofollow">https://t.co/GqaP5LYpza</a></p>&mdash; Bill Ackman (@BillAckman) <a href="https://twitter.com/BillAckman/status/1638659841358004225?ref_src=twsrc%5Etfw" target="_blank" rel="nofollow">March 22, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<p>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.</p>



<p>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.</p>



<p><strong><em>Do you think the US banking uncertainty parallels increased efforts to dismantle fiat-to-Bitcoin rails? Let us know in the comments below.</em></strong></p>
<p>The post <a rel="nofollow" href="https://tokenist.com/yellen-calls-unscheduled-fsoc-meeting-amid-banking-turmoil/">Yellen Calls Unscheduled FSOC Meeting Amid Banking Turmoil</a> appeared first on <a rel="nofollow" href="https://tokenist.com">Tokenist</a>.</p>

Yellen Calls Unscheduled FSOC Meeting Amid Banking Turmoil

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