A less-noticed new rule following the rescue of Silicon Valley Bank will make the Fed’s inflation-fighting task easier going forward – but it could leave Americans on the hook for wobbly bank balance sheets, DavidZMorris writes. Opinion
Crypto markets have experienced a surprising surge over the past few days, with bitcoin and ether rising by around 20% since late Sunday. Stock markets are down sharply Wednesday morning as banking’s woes expand to Europe, but the Dow Jones Industrial Average was actually up a little over 1% between Monday’s open and Tuesday’s close.
At the most obvious level, of course, the crypto surge and early-week steadiness in equity markets were reasonable first-order reactions to the Fed’s decision to designate Silicon Valley Bank and Signature Bank as “systemically important.” That emergency declaration suspended the normal rules of the Federal Deposit Insurance Corporation and allowed all deposits to be made entirely whole.
This is the essence of the “bad news is good news” logic of a market hanging on the Fed’s every twitch. But the specifics of the SVB and Signature insolvencies made the logic even more compelling. The banks were quite directly undermined by the Fed’s interest rate hikes, which undercut the value of existing Treasury bonds, leading to big losses when the banks had to sell those underwater bonds to cover withdrawals.
The duration of the loans is notably just one year, which is not exactly generous, so there’s at least some restraint on display here by the Fed. But it still means the Fed could wind up shouldering a lot of risk for banks: three have just blown up in rapid succession. Some level of default on these BTFP loans seems very plausible.
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