Solved or Just on Hiatus?

3.30.23 - 

Bank Failures: Solved or Just on Hiatus? - Econ-Intel

The bank failures of Silicon Valley Bank and Signature Bank were significant economic events. These failed banks were taken over by the FDIC on March 10th and 12th. Regulators worked to calm the market on March 12th by issuing a statement that the banking system "remains resilient and on a solid foundation".

To really understand what is happening, let's examine the banking data directly. Recently released figures now allow for a look at how banks are actually handling the situation. This makes it possible to assess the level of stress remaining in the banking sector.

Direct borrowing from the Fed suggests the risk of bank failures has not been resolved

Leading up to and through the bank failures, one would expect banks to borrow more money. However, once assurances were made, if the crisis had passed, there would be no need for banks to borrow yet more money.

Borrowings not only increased, but increased more than the week of the failures. Banks pay interest on borrowed funds and would not borrow money without cause. It makes sense for a bank to borrow, if it can invest the money at a rate higher than the cost of borrowing. This is unlikely to be the case in the current interest rate environment. Due to the Fed's rate increases, the cost to borrow exceeds the rate of return on safe investments.

The other reason that a bank would borrow is if it had to raise cash to meet depositor demand. This is more likely what is happening.