We do not have a video about the run on at the Silicon Valley Bank (SVB), but perhaps this one, from the 1964 musical ‘Mary Poppins’, which was Julie Andrews’ debut, could be a substitute. The bank run in the movie starts when Michael, the little boy who sensibly refuses to hand over his tuppence to the bank’s directors, preferring to feed the birds with it instead, shouts ‘Give me back my money’. Perhaps Michael grew up to be Bill Ackman, the United States hedge fund manager who has been tweeting stuff like this: “Our government’s failure to provide a temporary guarantee on all deposits is causing an unnecessary banking crisis which could have a profoundly negative effect on the economy. Confidence is destroyed quickly and can take years and sometimes decades to be restored.” It’s a bit like shouting ‘Fire’ in a crowded theatre.
Michael had a point — after watching open-mouthed as the bankers danced this jig while singing ‘Fidelity Fiduciary Bank’, the boy was entitled to his doubts. More seriously, the words of the song include this insight:
‘While stand the banks of England,
England stands. Ooo oooh ooh!
When falls the Banks of England,
That insight is now being applied to Switzerland, after the Credit Suisse collapse and the continuing fall in the UBS stock price.
That said, with central banks continuing to hike interest rates and with bank deposits fleeing to money market funds that offer higher rates, is the stage being set for more bank failures? We had a story on one study which said that even if 10 percent of uninsured depositors withdraw their money, 66 US banks with $260 billion in assets would fail. This is not the first time that attention has been drawn to financial stability risks arising from a rapid rise in interest rates. Markus Brunnermeir, professor at Princeton, wrote “there is now a clear trade-off between a monetary policy that tries to reduce aggregate demand by raising interest rates and one that aims to ensure financial stability”. Indeed, the IMF’s Tobias Adrian had flagged the risks to financial stability last October in this IMF blog. Kenneth Rogoff, professor at Harvard, wrote at the beginning of this year that “while banking systems are more robust than they were in 2008, a real-estate slump could severely affect heavily leveraged private-equity firms, producing a systemic crisis”. Global fund managers believe a credit risk event for US shadow banks is the biggest tail risk for markets.
It’s no surprise then that our attention was focused on the banking crisis in the US and Europe this week. This FT story, free to read for Moneycontrol Pro subscribers, described the fall of Credit Suisse, whose capital buffers meant nothing to scared depositors scampering to withdraw their money. My colleague Anubhav Sahu made the point that we now have a high volatility regime for both bonds and equities where there’s a fatter tail risk for accidents.
On the US banking crisis, we had three charts that illustrated it and several articles that focused on the lessons from the collapse of SVB here and here and here. Our columnist and Kotak Mahindra Life Insurance Company executive vice president Churchil Bhatt made the significant point that “when highly liquid markets begin to break without a reason, what is broken is confidence”— a reference to yo-yoing government bond markets.
We wondered why the US banking system is so fragile, while FT columnist Martin Wolf offered four ways to fix the bank problem.
We had stories on the opportunities in the midst of adversity, a GuruSpeak piece on how professional traders have managed to survive the market fall, whether the gold rally has legs, what lies ahead after two weeks of banking stress, and the Bundesbank chief downplaying the risk of contagion in Europe.
On the fallout of the global turmoil in India, we had a story on fund managers sitting on cash, another on why the ripples have not reached India, on the impact of the banking crisis on the IT sector, on the RBI researchers’ customary rosy outlook for India, one on why India’s deposit insurance isn’t high enough and on markets craving the end of rate hikes.
Of course, the Fed didn’t give in to market cravings, deciding instead to raise its policy rate by 25 basis points, despite the tightening of financial conditions. This piece tells us why it did so, this one says the banking crisis could be a blessing in disguise from the point of view of controlling inflation while another story tells us what cues investors should take from the Fed’s approach.
Finally, this article echoes the feelings of most of us when it says, “At this point, the US economy is so weird that it defies plain speaking.”
Jerome Powell, at his press conference, acknowledged that financial conditions had tightened as a result of the bank crisis, but he also said, “The question is, how significant will this credit tightening be and how sustainable it will be. That's the issue. And we don't really see it yet, so people are making estimates, people are publishing estimates but it's very kind of rule of thumb guesswork almost at this point.” If that wasn’t clear enough, he explained, “the key is... policy has got to be tight enough to bring inflation down to 2 percent over time. It doesn't all have to come from rate hikes, it can come from tighter credit conditions. So... it's highly uncertain how long the situation will be sustained or how significant any of those affects would be, so we're just going to have to watch.”
Powell has an unenviable job at the moment. Mohamed El-Erian, chief economic officer at Allianz and president of Queen’s College, Cambridge, said the Fed was on the horns of a trilemma — how to simultaneously reduce inflation, maintain financial stability, and minimise the damage to growth and jobs.
Fed former chairman Ben Bernanke once related the story of how a new chairperson at the US Council of Economic Advisers is presented a sign that says, “in case of emergency, open the bottom drawer”. When you opened the bottom drawer, said Bernanke, there was a bottle of scotch.
Perhaps, it’s time for central bankers across the world to follow that practice.
Here are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
ICICI Securities, Coromandel International, Weekly tactical pick, KNR Constructions, A high quality midcap, A hospital stock with best-in-class operating metrics, Engineers India, Diamond in the dust, Aditya Birla Capital, Shemaroo, AMC stocks, Gujarat Gas
Companies and industries
Interview with Blue Star MD B Thiagarajan
Thyssenkrupp’s steel business could tempt Indian companies to bid
E-2wheeler sales scale new highs
Discontinuation of ‘do not exercise’ a needless step
How India’s exchanges stack up against global peers
Backstop fund for corporate bond market
The Adani saga could have pernicious effects on India’s new energy economy
Pro Economic Tracker—labour force participation rate improves
Electricity demand exceeds FY22 level in eleven months
Odisha grabs the steel output crown
Copper price to surge to record this year
The Eastern Window: Xi Jinping’s road to Moscow
Japan’s Indo-Pacific initiative
India’s role in combating climate change
The spectre of Khalistan has raised its ugly head in Punjab again
Why corrupt netas rarely languish in prison
Tech lay-offs, Will 2023 be the year of lay-offs, Startup Street: when elephants dance with ponies, Marketing Musings