The FT needs decoding this morning to understand the message being sent by the financial markets.
Two messages suggest that central bankers think that the banking sector is in crisis, whatever is being said in public. First, there is this:
The article says:
Andrew Bailey has said the Bank of England is working on reform of Britain's bank deposit insurance guarantee scheme, raising the prospect of increased protection for customers.
Speaking in response to high-profile bank failures on both sides of the Atlantic, the BoE governor suggested the UK might need to increase its limit for guaranteed deposits above the current £85,000 — which is far lower than the $250,000 level in the US.
Then there is this:
The thinking in Brussels is different: it is more about how to assist depositors locked into accounts with failing banks to get their money out when there is a threat to the bank's solvency. But the basic concern is the same as that the Bank of England has noted: banks are at risk of falling over and saver protection is required.
I then noted another article:
Guess whose debt is being shunned? Smaller banks, of course. Not entirely, but that is the big issue. It's easy to see why the Bank of England and European Central Bank are worried.
Finally, there was this:
Exchange traded funds are explained in a new glossary section published this morning.
The key issue to note from the FT article is that money is flooding out of the corporate sector and into government bonds.
Why would all these events be happening simultaneously? The only explanation is that there is much more of a banking crisis going on than bankers (including Andrew Bailey from the Bank of England, speaking at the International Monetary Fund) wish to admit is happening.
We are not out of the threat of a banking crisis as yet. And the usual state-backed bailout for bankers is already being lined up.
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So is this more evidence that the current strategy of the CBS is wrong & interest rates need to be reduced, Richard?
Yes
“And the usual state-backed bailout for bankers is already being lined up.”
surely
“and the usual socialism for bankers is already being lined up”?
Indeed
And the obvious parallel between the enormous sums that are disbursed from the public purse to support the bankers, when much smaller sums are “unaffordable” when it comes to public sector pay in general and the NHS in particular.
So, as ever it’s not what they say that matters, it’s what they do.
You can argue that words will contain any panic but it’s what they’re going to do about short term greed that matters really.
I have just listened to two blethering, blithering BBC Radio Scotland ‘journalists’ who were unable to distinguish the difference between money and a card transaction (credit). Banks turn money into credit (it is the only alchemy they possess). It is how they make profit, and they bust the system at regular intervals in the folly of the endeavour.
The whole banking system is claimed by neoliberals to be the leading edge of ‘free enterprise’, but it requires bank deposit guarantees from the State for anyone to trust them; and neoliberal Government knows it. Banking cannot understand how to handle the problematics of derivatives in a digital, real-time world responsibly – how close to entropy they bring the whole economy; and depositors are slowly working out, from bitter experience, just how stupid the bankers and neoliberal Government together can be (but they are still a long way from joining the dots).
Most people probably think that the balance in their bank account is stored in a bank vault somewhere. But, of course, that’s not the case. The balance is merely the bank’s IOU to the customer. And that’s the problem.
That’s why the banks need a free government deposit guarantee. This is an enormous subsidy to the banks.
Perhaps it is time that the banks either paid a commercial rate for this guarantee, presumably to the government because no-one else can meaningfully back that guarantee. Or else they should have 100% cover in central bank reserves.
It’s not obvious to me why commercial banks should be allowed the privilege of creating money through loans, and getting a free government guarantee to do so.
Or, perhaps, I am missing the point and don’t understand (I’m sure neo- liberals would tell me not to worry about something I don’t understand)
They do contribute towards the cost of the guarantee but at way below its value in terms of cost of capital
Meanwhile readers of this blog will be delighted to know the following:
https://www.desmog.com/2023/04/12/banks-fossil-fuels-finance-climate-chaos-royal-bank-canada-jpmorgan-chase
The article is headlined: “World’s Biggest Banks Poured $673 Billion Into Fossil Fuels Last Year”
Worth a read, …………..total & complete systemic failure, banks out of control (have they ever been under control?) , greed rules and climate disasters are irrelevant to the primary importance of making vast amounts of money.
It’s like flushing loaned funds down the loo….
The authorities are obviously getting jittery as they are very keen to point out that the situation is “not as bad as 2008” Any run on the banks now will cause panic and well do they know it. As mortgage defaults increase confidence will disappear. and the financial house of cards will tremble
To be fair to Andrew Bailey (something I never imagined I might type!), one of the lessons of SVB was the speed of retail deposit withdrawal due to (a) deposit concentration (a few large deposits from start ups), (b) information (SVB’s woes were played out in main stream media in real time) and (c) technology (you could move your money out with a click of a mouse).
How might those lessons be applied to the UK? Well, raising the level of deposit insurance is one thing that might make sense. Certainly something to examine.
There are lots of things I am critical of with regard to Andrew Bailey and the BoE (how long have you got??!!) – but this is not one of them.
Do bankers think we are in trouble? Hmmm, not really as the interest rate risk management regime in the UK (and Europe) is different from that which did for SVB.
What keeps them awake at night is falling house prices and a sharp recession…. and quite a few that I know are worried (for the reasons that you have often elucidated on this blog). Declining Credit Quality is the bankers’ nightmare. Although this is linked to to interest rate policy it is not “direct” as it was with SVB.
Wise ones also worry about the security for loans – and May are collateralised on assets that will go underwater one day and sometime they will be left with literally sinking asset valuations
Indeed, “underwater” house prices are bad news for bankers as they foreclose on loans in the downturn; literally underwater houses (those susceptible to flooding) are even worse. Bankers and insurers should be in the vanguard of the green agenda.
And they aren’t
On the subject of Banks and trust, another entry in the list of completely unremarked reversals that have occurred in the last forty years has to be the great sea change that has occurred is the need for a bank to have a reputation for honesty.
Fines of hundreds of millions or billions for breaking regulations or criminality that in the past would have seriously damaged a bank are now shrugged off by the Financial sector in which they operate as if it was all perfectly normal.
Despite, or more probably because of all this, the Financial sector remains the most molly-coddled, the most privileged, the most Government supported industry this planet has ever seen.