Breakfast briefing: Are those smoldering embers really out?

Business / news

The pressure on banks remains high but markets sense the worst is over; China holds LPRs; Taiwan export orders fall; German PPI stabilises; UST 10yr 3.49%; gold and oil down; NZ$1 = 62.5 USc; TWI-5 = 70.5

21st Mar 23, 7:19am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand, with news that both bond and equity investors are still buying - despite major repricing underway in the giant bond sector. The S&P500 is up today. The UST 10yr benchmark yield is higher too.

But as the embers of last week's bank blaze smoulder, investors are assessing where to next. Scepticism that the risk to banks is over, is high. But the weekend unveiling of a new large central bank facility coordinated by the Fed only brought token demand overnight, which is a good sign.

The pressure on some American regional banks remains however (especially First Republic where a second rescue is underway), and investors wonder about the sense of the Swiss concentrating all their risks on one giant global bank.

And although most investment managers think the regulatory actions taken so far will be sufficient, their investments in bank bonds are at serious risk after the Credit Suisse bonds were essentially wiped out. There is now a serious repricing of risk in these bonds underway, and questions about the very future of the US$275 bln market in high-yield bank bonds that are used to underpin bank capital requirements.

However, with the Fed reviewing the situation in its meeting this week, investors seem to now expect a rate hike pause, although +25 bps is still priced in for this Thursday's announcement (NZT). Equity investors aren't shying away from buying.

But in Hong Kong, there was a very sharp sell-off of bank shares, especially those of HSBC which fell more than -6% yesterday. There were also sharp markdowns of other European-based banks overnight.

As widely expected, China kept its key lending rates steady for the seventh straight month at its March fixing late yesterday. The one-year loan prime rate (LPR), which the medium-term lending facility uses for corporate and household loans, was left unchanged at 3.65%; while the five-year rate, a reference for mortgages, was held at 4.3%.

Taiwanese export orders fell for a sixth straight month in February, hurt by both slower Chinese and other global demand. These exports are a bellwether for global tech demand. If there is a positive, it is that the latest fall it is that they shrank at a slower pace in February.

In Germany, producer prices are retreating now and were down less than -4% on an annualised basis, the fifth straight month of decline. Energy prices are keeping overall prices elevated still. On a year-on-year basis they slowed for the fifth straight month to a 17-month low of +15.8% as sharp hikes through September are still echoing in this data.

The German central bank had an improving assessment of the prospects for the German economy in its latest update.

Locally, the most likely impact on the global bank turmoil will be that risk premiums rise for debt funding. Benchmark yields may fall, but those risk premiums are likely to rise, limiting the 'benefit' of lower interest rates.

The UST 10yr yield starts today at 3.49% and up another +5 bps from this time yesterday. But the UST 2-10 rate curve is still less inverted at -45 bps. Their 1-5 curve inversion is marginally more at -81 bps. And their 30 day-10yr curve is much more inverted at -80 bps. The Australian ten year bond is down -11 bps at 3.27%. The China Govt ten year bond is still at 2.88%. And the New Zealand Govt ten year is starting today down a very sharp -17 bps at 4.26% and its lowest since mid February.

Wall Street has opened its Monday trade with the S&P500 up +0.7% in a general vote of confidence after the weekend regulatory moves. The expectation that the Fed will scale back its inflation fighting is also part of this. Overnight, European markets all rose more than +1% (expect London which lagged). Yesterday however, Tokyo fell -1.4%, Hong Kong fell an eye-watering -2.7%, and Shanghai gave up -0.5% in Monday trade. The ASX200 ended its Monday session down -1.4% and that was mirrored on the NZX50.

The price of gold will open today at US$1976/oz and down -US$13 from this time yesterday.

And oil prices start today down another -50 USc from yesterday at just under US$66/bbl in the US. The international Brent price is now just under US$72/bbl.

And we should also note that lithium prices continue to fall sharply, now down almost -50% from their peak in November. This should ease the cost of EVs.

The Kiwi dollar is down -¼c against the USD and now at 62.5 USc. Against the Aussie we are -½c lower at 93.1 AUc. Against the euro we are also -½c lower at 58.3 euro cents. That puts the TWI-5 at 70.5 with a -40 bps retreat.

The bitcoin price is a tad softer today, now at US$27,651 and down -1.1% from this time yesterday. And volatility over the past 24 hours has been moderate at +/-2.4%.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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83 Comments

by murray86 | 21st Mar 23, 7:35am 1679337347

A big concern I have with the current banking turmoil is the apparent lack of hedging the banks seem to be undertaking with their capital management, when they buy bonds. Government issued bonds, supposedly the safest way to hold capital, issued at low interest rates surely must have been viewed as increasing in risk as the ever forecast increase in interest rates loomed closer? And as David indicates risk premiums are likely to increase, but how likely is it that these will be paid to depositors for the balance in their accounts? The consumer on the street's risk over banks failing in their fiduciary responsibilities has been proven to be significant, but where is the acknowledgement of that?

by HW2 | 21st Mar 23, 7:57am 1679338642

If someone asks what you want for brekkie, don't ask for coco-pops. **BANG** The CS coco investors will be asking themselves what just happened as the bailout turned into a bail-in

Why $17 Billion in Credit Suisse ‘CoCos’ or AT1s Got Wiped Out in UBS Takeover

https://www.washingtonpost.com/business/2023/03/19/why-credit-suisse-co…

by sit23 | 21st Mar 23, 10:14am 1679346841

The next article down was just as interesting. How the rich people got a bailout, and the poor people got stiffed again.

by agnostium | 21st Mar 23, 2:07pm 1679360850

Can you post link please?

We all see the articles in a different order.

by nightstalker | 21st Mar 23, 9:55am 1679345716

Hindsight is 20/20.

The banks like many FHBs (myself included) have bought the idiotic talk of ALL Western central banks "inflation being transitory".

The market has flip-flopped in unprecedented speed and magnitude and central bankers seem to forget that it's not that easy to adapt to these changes in the physical world as they would like.

by sit23 | 21st Mar 23, 10:23am 1679347438

Banks borrow and lend at a margin and charge fees. They have shareholders who get a divvy if all goes well. They have executives who get bonuses if all goes well. It is quite simple. It is only not simple when things are manipulated to suit a sector. Shareholders want share price to rise for no good reason other than their own personal gain. Executives do buybacks, and other dodgy stuff as they have a share price increase bonus built in to their pay packet. The same people do really dodgy investment and borrowing practices to keep the whole bonus system going. Then they come unstuck and get bailed out. if they can't find another job they manage their own investments. Great fun.

by powerdownkiwi | 21st Mar 23, 7:40am 1679337648

But the weekend unveiling of a new large central bank facility coordinated by the Fed only brought token demand overnight, which is a good sign.

So-called ' liquidity', is keystroked numbers.

The problem is that the global collection of forward bets, seriously exceeds the planet's remaining ability to underwrite same. You have to make heroic assumptions to believe pensions will be around in a decade, for instance.

So that ' good sign' is really just a whole lot of worried people who will willingly believe what they want to hear. To my way of thinking, that's not a sign - it's just an observing of a bunch of lemmings.

by Fossil Lover | 21st Mar 23, 8:10am 1679339409

Swap lines. Is that not the USA's way of exporting their inflation? But without inflation the Fed and the US government are bankrupt. The Fed is no longer the lender of last resort, but the investor of last resort. And the US dollar backed by the US government (taxpayer) is over leveraged. You can only kick the can down the road so far...

by Hemi Waipiro | 21st Mar 23, 8:24am 1679340255

PDK "You have to make heroic assumptions to believe pensions will be around in a decade, for instance."

Another instance must therefore be peoples Kiwisaver funds. If you're younger than say 55, Kiwisaver is more than likely 'dead wood' given you're not seeing it until 2033 at the earliest. This would equally apply to other country equivalents....

by Hardly | 21st Mar 23, 9:10am 1679343053

KiwiSaver is not government funds. Explain what you see the risk as.

by powerdownkiwi | 21st Mar 23, 9:25am 1679343906

Kiwisaver is betting on the future, in share-proxy form.

And the aim was to bigger the bets. On a finite planet, it was always a ponzi - the only way you could believe it was to ignore physics, paticularly energy physics. Economics did that by choosing to stay with labour as if it were energy (whereas compared to fossil energy, labour is mere noise). Essentially, economics chose to believe in a flat earth.

A growing percentage of those Kiwisaver expectations, cannot be underwritten - they are, when you get down to it, expectations that they can be cashed-in for parts of the planet in the future. An overpopulated, over-contended, over-drawn and drawing, planet.

Shares have to be part of the reconciliation. Good luck with that...

by refactornz | 21st Mar 23, 9:30am 1679344224

And yet the dollar value of those investments will keep going up over time and people with large investments will be better off than people with low or no investments.

The alternative in powerdownkiwi's world seems to be to let people starve to death in their old age.

by powerdownkiwi | 21st Mar 23, 9:59am 1679345995

Straw-man self-justification, unless I miss my guess.

Dollar value is an oxymoron. Purchasing-power is the metric. Bits of the planet is the medium.

In the long view, you're arguing on behalf of essentially a single generation, who dug up, burnt, polluted, decimated, depleted - and then want those who will inherit the mess, to fund their old-age.

Whatever.

There were too many of us, and we were living well beyond the planet's carrying-capacity. Don't obfuscate that, with 'dollar value', please. Try this:

https://www.resilience.org/stories/2023-03-20/a-bigger-boat/

Note his CV... Actually, all his Great Simplification podcasts are interesting...

by Hardly | 21st Mar 23, 10:21am 1679347305

I disagree with you powerdownkiwi in that I see an abundant future. We are at the transition from a society of extraction with diminishing returns - what your predictions rely on - and a society where our technological mastery allows us to create energy with increasing returns. Because if a solar panel takes less energy to produce than it creates, there is no limit is there. And yes, while matter is finite, the universe is to all intents and purposes infinite.

by interesting1234 | 21st Mar 23, 11:09am 1679350164

You are discounting the human tendency for greed. You are assuming that technology magically makes things better. Technology and law can go so far but as lng as human greed exists and is rewarded in spoils, I won't bank on technology being our saviour. We can only control so much, we cannot change foreign governments such as China, India and the USA from breaking emissions pacts or ignoring them outright in order to prop themselves up geopolitically and economically above others.

by the Joneses | 21st Mar 23, 11:21am 1679350874

"Because if a solar panel takes less energy to produce than it creates, there is no limit is there."

Well you need somewhere to put them all (if farmland the you have less food), and they need maintenance (removing weeds and dust) and security. Also if you want power when it isn't sunny you need lots of batteries. So there are definitely still limits to solar power.

by Hardly | 21st Mar 23, 1:59pm 1679360394

You need to cover a very small % of the worlds surface to generate all the power we need. It’s not a land problem. In a lot of cases desert is the best land for solar panels. Also, roofs and other surfaces are great for solar panels and they aren’t doing anything useful.

by Mannering | 21st Mar 23, 10:19am 1679347176

PDK, you and some others on this site often say "it's the physics " in responding to and putting down people expressing views contrary to or critical of your own. My I be so bold as to enquire where your understanding of physics comes from ?

by kiwimm | 21st Mar 23, 10:26am 1679347583

You can check the numbers here Post Index | Do the Math (ucsd.edu)

by kiwimm | 21st Mar 23, 10:29am 1679347748

If stock markets and banking are in terminal decline then where to invest your money now to ensure a better future?

by Rob Reid | 21st Mar 23, 10:42am 1679348554

There won't be a better future (except maybe in the far future). Just try to minimise your losses.

by powerdownkiwi | 21st Mar 23, 10:59am 1679349564

But kiwimm's question is a good one, and there is a good answer

What you do, as far as practicable, is work out what you will want in the future, and buy it now. After all, that was the ultimate destination of your savings, right?

Sure, perishables. Sure, changes of circumstance. Convenient quibbles - but generally speaking, keystroke issued digits? I'd rather a handful of hacksaw blades and some alkathene fittings....

by kiwimm | 21st Mar 23, 12:31pm 1679355090

Tools are a good call. Preferably good quality electric ones you can run from your home solar (corded rather than battery as the batteries won't last and will be hard to replace). Add to that skills to use them to make the things you need.

Add some productive assets - good growing land, forestry, solar panels. An EV with AWD, good ground clearance and an LFP battery should give you a 20 year lifespan and likely a competitive advantage during this time but you would need to keep a stock of perishable parts like tyres.

Also throw in some YOLO experiences even though these will accelerate our downfall. At least you will have some good memories to comfort you when the SHTF.

by kiwimm | 21st Mar 23, 12:11pm 1679353876

Better in this sense is not absolute, rather it is relative to everyone else

by HeavyG | 21st Mar 23, 11:51am 1679352680

Go full retard.

https://theconversation.com/the-last-of-us-why-we-should-all-think-like…

by Hemi Waipiro | 21st Mar 23, 10:06am 1679346365

The risk is that this financial event cannot be contained by Public Coffers and is therefore systemic risk.

Private Financial Institutions are (much like leveraged private households) coming under increased pressure from increasing interest rates meaning realizing one’s assets (Bonds, Houses, Equities) does not provide as much ‘value’ as one thought they had. Yet the increasing cost of obligations increase - Depositors, Creditors, Food, Energy. Whilst a certain amount of losses can be absorbed by the people (socialized and accepted), the credit risk of all financial institutions will blow out, rerating all institutions bonds which can’t be contained by Public coffers. Rerated bonds will become extremely high yielding (lower $ values) leading to pension funds, super funds, kiwisaver funds value destruction. Remember in Kiwisaver, you have a limited subset of investments, equities, bonds, cash. Your funds are tied explicitly to the financial system – while you can shuffle them about, you can’t move them out and they're all being rerated down.

This of course will lead to further societal decay.

by Rob Reid | 21st Mar 23, 10:37am 1679348273

Fine comment. Yes, in a nutshell the loss of "claims on future resources" (to paraphrase PDK) is now finally being realised by force. Collectively our only choices involve apportioning the losses, and they are significant.

It's not just too much demand. By pumping up asset prices we have disincentivised work, which is another constraint on increasing supply.

Could anyone name a politician who has the gall to tell us we have started on a path to reduced standard of living and there is nothing we can do about it?

by Hemi Waipiro | 21st Mar 23, 12:04pm 1679353448

I realise everything is linked, but personally I think that societal decay (lack of values, respect, debate and pure desperation) from financial living costs and wealth destruction will occur well before some utopic carbon free future is realised. Therefore, I think it was remiss of the Government not to nationalise Marsden Point for some incremental form of future preparedness - even though we want to reduce our dependence on FF. The Scouts motto 'Be Prepared' springs to mind.

To your point, no politician would do this unfortunately as many people are status and emotionally driven and are not necessarily rational, logical thinkers. Our way of life is a drug and we won't give it up willingly.

by linklater01 | 21st Mar 23, 11:13am 1679350427

Hemi,

PDK "You have to make heroic assumptions to believe pensions will be around in a decade, for instance.

Why? That's an extraordinary claim, so needs some serious evidence to justify it. What is the evidence?

by mrjadedvagabond | 21st Mar 23, 7:41am 1679337686

Has there been a media blackout on the bank Failures? I Didnt see any other storys about it this morning

by interesting1234 | 21st Mar 23, 11:11am 1679350305

They know it will incite panic, and influence further bank runs. Should this behaviour happen it would be catastrophic worldwide

by whakahokia mai | 21st Mar 23, 12:38pm 1679355537

I wonder where the fleeing depositors are ‘holding’ their withdrawn funds? What is left after banks for our cash? Under the mattress, bitcoin and gold?

by Averageman | 21st Mar 23, 7:46am 1679337975

Is it just me or does the gamblng nature of the banking system underline that they are not worth the paper they are written on...?

by Fossil Lover | 21st Mar 23, 7:49am 1679338192

Banks cannot survive higher interest rates (or Wall Street), only the too big to fail banks who have the FED as a backstop. Interest rate hikes will end and inflation will continue. The financial sector breathes a sigh of relief and the savers and wage earners get screwed again.

by Peter M | 21st Mar 23, 8:01am 1679338902

The coming recession will take care of inflation. It is only a quess how deep this recession will be but it won't be shallow.

by powerdownkiwi | 21st Mar 23, 8:12am 1679339547

I gave you an uptick for the last sentence. Yes, the question is: Where will the floor be?

But the problem with inflation, is that resources - increasingly including essential ones - are increasingly being contested. Yes, the poor get out-bid - but if it's food they're bidding for, they'll bid all they have. And maybe more - this is exactly what was/is behind the Captain Phillips narrative.

There has to be a reconciliation, a big one. And maybe it will be too big to contain. And very likely, those who hold the reserve currency at the end (the most powerful claim on resources) will not include the US and its hangers-on.

by murray86 | 21st Mar 23, 8:31am 1679340700

That last sentence is a bold prediction PDK. But more to the point; a pretty good example of obfuscation and denial is the CNN report on the IPCC report to the UN. Politically the rich and powerful clearly still believe they can dig themselves out of the hole they've dug for all of us. Or is this just a competition for the last man standing?

by Grattaway | 21st Mar 23, 9:46am 1679345197

Not so sure that the rich and powerful believe that they can dug themselves out of a hole - more likely is that they see this as a gravy train that they can profit from - and its all supported by taxes paid by ordinary people

the current messaging is that we are not spending enough - trillions are needed and the big players will be the winners

by murray86 | 21st Mar 23, 10:04am 1679346288

Yes, there is talk about direct carbon removal from the atmosphere, but as PDK would point out, there is simply not enough energy to do that successfully. And the one thing that is not mentioned in any of the reports? POPULATION!

by sparrow | 21st Mar 23, 11:16am 1679350619

True Murray, but some people are a lot more damaging than others. Cull the 10% wealthiest people on the planet and emissions would drop by 50%.

by refactornz | 21st Mar 23, 2:50pm 1679363425

Half of NZ would be within that group.

by interesting1234 | 21st Mar 23, 11:14am 1679350466

The rich and wealthy believe they are insulated from the coming recession, and have the means such that they are the least effected, and can take advantage of the situation to further their wealth.

It is for this reason the are part of the problem, not be part of the much needed solution.

by GV 27 | 21st Mar 23, 8:10am 1679339418

I believe common consensus is the minimum price for US oil operations to remain viable is around $70 USD/barrel. Below that point it's cheaper to simply not operate.

by powerdownkiwi | 21st Mar 23, 8:15am 1679339742

https://www.thegreatsimplification.com/episode/61-gareth-roberts

by Audaxes | 21st Mar 23, 8:38am 1679341104

Are those smoldering embers really out?

As I wrote in a January 2022 Financial Times OpEd, The Fed Policy Error that Should Worry Investors, the central policy error of the Fed occurred well before inflation became problematic. That error was “abandoning a systematic policy framework for more than a decade, in favor of a purely discretionary one. The critical policy error may be the consequences of discretionary policy on the financial markets. By relentlessly depriving investors of risk-free return, the Fed has spawned an all-asset speculative bubble that may now leave investors with little but return-free risk.”

The essential ingredients of recent bank strains involve excess bank deposits, well beyond FDIC insurance limits, coupled with losses in the asset holdings of banks, particularly in securities like long-term Treasury bonds that are ordinarily considered “safe.” Silicon Valley Bank did not have enough liquidity to tolerate a bank run, and it did not have adequate solvency to qualify for emergency loans. But emphatically, the failure did not occur because there is too little liquidity in the banking system as a whole. It occurred because there is too much.

The “excess deposits” are there because the Fed put them there. The U.S. banking system has more than $1 trillion of deposits that exceed the FDIC insurance limit, and nearly $8 trillion of bank deposits in excess of bank loans, because more than a decade of “quantitative easing” took bonds out of the hands of the public and replaced those bonds with zero-interest bank deposits. Overvalued long-term securities dominate portfolios because yield-starved investors and banks couldn’t tolerate the perpetual zero-interest rate world created by the Fed, and felt forced to reach for yield.

All of those holders – investors, banks, pension funds, everybody – reached for yield, driving the equity market to valuations beyond their 1929 and 2000 extremes; driving interest rates to historic lows; driving the risk-premiums on low-grade debt to levels that still provide little margin of safety; encouraging speculative new issues of stock and covenant-lite debt; encouraging Silicon Valley Bank and others to invest their excess deposits in securities that might offer them something more than zero.

Even as banks like SIVB created a “duration mismatch” by using short-term deposits to finance investments in long-term Treasury securities, they escaped the scrutiny of regulators because “risk-based capital ratios” consider Treasury securities as risk-free, with a risk-weighting of zero. As former FDIC Vice-Chair Tom Hoenig observed, “The weakness is the use of risk-weighted capital measures, rather than equity capital measures that take in all assets. Silicon Valley Bank’s 16% risk-weighted capital looked great, but if you include securities with interest rate risk, and losses on them, they only had 5%.”

by Audaxes | 21st Mar 23, 10:23am 1679347436

After the GFC, regulators told banks they had to hold a ton of liquid assets. And that Treasuries were as liquid as cash. No liquidity haircut, no capital to hold against Treasuries: same as cash. So banks went ahead and bought a ton. Link

by bw | 21st Mar 23, 8:45am 1679341539

Today feels very much like the calm before the storm.

It's like watching a boxer whose had the daylights beaten out of him during round 10, and who was on the verge of being knocked out, only to be saved by the bell. They're now in their corner being towelled down by their trainers and pasted back together, knowing it's only a matter of a few short seconds until the bell rings again, when the inevitable next round commences, and they know it's probably beyond their capacity to survive the coming round.

Ting, Ting. Seconds out! Round 11......

by GV 27 | 21st Mar 23, 8:49am 1679341794

I still can't over the speed of intervention that we've seen. By all accounts they needed to do something, but from what I understand what they've effectively done is underwrite every bank deposit held in American banks. If so, 'too big to fail' has been left behind well and truly. It's just moral hazard all the way down.

by IT GUY | 21st Mar 23, 8:57am 1679342237

If things go pear shaped they will not have enough to backstop all deposits... This is just tough talk to stop bank runs.

Nothing improves the position of the 200 odd banks that apparently hold a lot of MBS to maturity or hold treasuries which with M2M would be worth well less than par. If I had a large deposit in a US bank I would be choosing which bank very very very carefully. These same banks bank roll most US commercial property loans.

The Chinese have their own problems around property loans that will never be paid back.

by bw | 21st Mar 23, 9:01am 1679342518

We have very short and selective memories.

In the United States, 15 banks failed in 2008, while several others were rescued through government intervention or acquisitions by other banks.On October 11, 2008, the head of the IMF warned that the world financial system was teetering on the "brink of systemic meltdown". On October 24, 2008, many of the world's stock exchanges experienced the worst declines in their history...the deputy governor of the Bank of England, Charlie Bean, suggested that "This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history.

And Charlie was right. Up until now.

by IT GUY | 21st Mar 23, 9:22am 1679343760

I was sitting on a bank trading floor during this period, there was day after day of 3% + falls. Watching NZDUSD sit on Reuters Dealing with 40 point bid / offer spreads at midday. Banks made a lot of money on those spreads. The answer was QE and the USD dropped hard. Remember, 2008 was saved by CO-ORDINATED global interventions.... now countries use events like this as economic instruments of war.

by powerdownkiwi | 21st Mar 23, 9:27am 1679344076

It wasn't 'saved'.

It was can-kicked.

And the can is what, twice as big? More?

And it's in the gutter.

by IT GUY | 21st Mar 23, 9:48am 1679345320

The can is now so big, its hard to miss if you try to kick it. but the kick seems to move it a week down the line, not a few years anymore.

by mfd | 21st Mar 23, 9:00am 1679342402

As I understand it, the management of SVB (and I think other banks that have fallen over?) have lost their jobs. The investors have been left with nothing, or cents in the dollar for Credit Suisse shareholders. The moral hazard for the owners and managers remains - they stand to lose everything. The majority of depositors are just normal people and companies wanting to park their money somewhere convenient and have little influence on how the banks do their business.

I'm still figuring out how to think about all this, but there's still moral hazard for those in charge.

by bw | 21st Mar 23, 9:06am 1679342803

There will be alls sorts of contractual parachutes and 'bonus' clauses to go along with termination. e.g.

Silicon Valley Bank's UK arm handed out over 15 million pounds in bonuses days after its rescue deal this week by HSBC,

by mfd | 21st Mar 23, 9:12am 1679343134

Did the UK arm do anything wrong, or are they collateral damage? Genuine question.

I certainly don't know the details of the US management's termination, I'd certainly hope that the complete collapse of the company is enough to void any such payments. Maybe the management can join the queue in any liquidation proceedings?

by chebbo | 21st Mar 23, 9:13am 1679343235

You need to change the way you think about deposits. When you deposit money at a bank, you're not just giving it to them so they can look after it for you for a while. You're lending your money to the bank, and as with any loan, there's always a risk that you might not get it back.

This needs to be better understood. There's just as much moral hazard in bailing out depositors as there is with bailing out the banks.

by mfd | 21st Mar 23, 9:27am 1679344053

That's a fair point. We're all culpable for the decisions we make. Rightly or wrongly, I do feel differently about the retired fellow losing half his savings when the bank he chose because they have a nearby branch implodes, compared to the risk manager of SVB who decided long dated, unhedged securities were a good place for their pile of deposits losing his job and options. Or the Fisher Funds investor losing 3% of their portfolio after farming it out to others to manage - that's all part of the game.

No one is truly innocent, but I think the depositors are as close as you can get.

by murray86 | 21st Mar 23, 9:35am 1679344513

it's a point that has made many times in the commentary here over the recent years. The problem is the regulatory authorities don't get it. Or they just refuse to protect the ordinary people. Deposit insurance doesn't do it. It is a sop to political expediency and is more about bailing out the banks rather than protecting the ordinary folk on the street who don't have much if any choice about having to use a bank.

by nigelh | 21st Mar 23, 10:49am 1679348955

I'm actually not that much in favour of deposit insurance and do not have a problem with OBR provided the banks capital ratios are increased with other necessary measures in order to reduce the risk of a bank's failure. As one other commentator alluded a day or two ago about jail terms, special punishments need to be legislated for bank executives officers and boards.

by murray86 | 21st Mar 23, 12:06pm 1679353575

Take a closer look at the OBR. It is in reality about bailing out the bank not protecting the depositors. Indeed within the OBR is the provision to give depositors a "haircut". In other words the OBR legitamises the theft of depositors funds when the bank has mismanaged its own business.

by Audaxes | 21st Mar 23, 9:36am 1679344573

Banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source.

According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.

Meanwhile, even as banks receive 4.625% from the Fed [RBNZ} on their reserve balances, they continue to take a miserly approach to depositors. As one major bank CEO proudly observed on CNBC, “As rates rise up, our zero-interest deposits, which are a core part of our franchise, and our low-interest checking, obviously become a lot more valuable.” Link

by rastus1 | 21st Mar 23, 9:37am 1679344674

Or put another way. When you get paid your employer just lends money to your bank under your name. And there appears to no way to avoid this ticket clipping.

Remember the days when the pay packet contained cash - and it had to last the week, there was no credit.

We had affordable houses back then as well. No silly borrowing to pump to the moon.

by Three Veg | 21st Mar 23, 10:43am 1679348625

Yes, but this shouldn’t be how checking accounts work.

They shouldn’t be lending it out, and yes you should be paying the bank to look after it for you.

by rastus1 | 21st Mar 23, 10:51am 1679349110

Maybe start a 'safe' bank.

Bring your cash to the Bank Of Rastus or BOR.

BOR has purchased the old bank note factory in Whangarei. The cash is stored on site and not lent out.

But then again.........

by Nzdan | 21st Mar 23, 11:05am 1679349900

It's quite trendy these days to blame victims though. Claim they should have been "more savvy" when choosing which bank to deposit funds at.

What next, do we blame the homeowner if the registered electrician they hired stuffs up the job and their house burns down? "They should have known the electrician shouldn't wire up 10amp appliances to a 20amp breaker". "They should have been more thorough in their vetting process".

by rastus1 | 21st Mar 23, 11:34am 1679351663

Agree. A basic term deposit should be risk free and not lent out, a charge could apply to hold it. If lent out then the interest rate should reflect the level of risk tied to the lending out - and made clear to the deposit holder what the investment type and risk is that the deposit is on lent to.

Is there anything to stop a bank creating such a deposit account and ring fencing that cash I wonder? I guess it wouldn't be popular, but might be for % of your cash if you have a lot.

by whakahokia mai | 21st Mar 23, 12:51pm 1679356291

Unfortunately your deposit is also multiplied by a factor of 10 and that new number is what is lent out. Your dollar plus 9 ‘new’ dollars. A scary system not set up to protect our interests as depositors.

by Fossil Lover | 21st Mar 23, 11:49am 1679352546

Correct, once you deposit money in the banks, it is the banks money. Banks fail and depositor's are last in line. Kind of like giving to Bernie Madoff.

by donny11 | 21st Mar 23, 9:07am 1679342836

If the FED doesn't raise the fed fund rate tomorrow. They are de-facto abandoning CPI targeting. This will be taken by the markets as a very inflationary indicator. The credibility of the USD as a store of value will be seriously undermined. However if they raise the fed funds rate there will be a lot more pressure on a already stressed banking system.

I guess as a muddle through they could raise the FED funds rate but offer liquidity to struggling banks. However this doesn't really address the core issue which is these small banks are suffering from a solvency crisis not a liquidity crisis. In that providing liquidity will stem the bleeding but not fix the wound.

As a realist. I am of the opinion that the FED will chose the stability & solvency of the banking system over the integrity of the USD as a store of value. But we will see.

by OldSkoolEconomics | 21st Mar 23, 9:40am 1679344833

If a fed rise is priced in already (a small rise)and assuming nothing else breaks today my bet is they follow through and make some noise about watching the situ carefully.

Tommorow is another day :)

by IT GUY | 21st Mar 23, 9:53am 1679345628

I agree FED go 25bps. They cannot go zero and keep credibility, they cannot go more with the current situation.....

This coming US recession is going to be a doozey, read same for China.

China cannot become a reserve anything, no one in the west trusts them.....

Personally I think the next domino to fall is going to be in Europe.... perhaps even a German bank.

by OldSkoolEconomics | 21st Mar 23, 10:41am 1679348507

Possible the sharks are picking on weaker banks one by one and shorting the stock .. people will be worried now so as soon as the media starts a negative story about a particular bank there will be a run on it, stock drops and money is made.

The powers that be are probably be running round in circles trying to prop things up as they crack and pressure mounts - trouble is that they have to keep raising rates and then watching for the weaker links and sticking plasters on them.

Gotta pray we dont have too many issues so the rates can keep rising and stay on top of inflation. not a game i would want to play

by Mannering | 21st Mar 23, 11:05am 1679349908

Indeed. Deutcher Bank ? But wait, that translates as German Bank and, like Qantas, can not be allowed to fail, in its case because of the name and size, and in the second case having a Kangaroo on its aircrafts' tails.

by Foxglove. | 21st Mar 23, 9:40am 1679344801

“Calm before the storm.” Bit like in the circus act, the old lion tamer, losing his grip. One big male lion says to the other “remind me, what’s scary about a chair.”

by powerdownkiwi | 21st Mar 23, 10:04am 1679346251

So we'll see a sequins of events?

by malamah | 21st Mar 23, 10:41am 1679348497

Would need to look further into it, but the next illiquidity crisis for these smaller banks may be the commercial real estate securities. Dishing out loans for commercial real estate in the US which no longer serves the purpose it did two or three years ago. If we have companies waiting for their lease to expire and see no need to renew, then what happens to the value of commercial RE in the US. Then what happens to the value of those loans no longer backed by property.

I guess this will be the time these banks will be bought, as I couldn't understand why SVB was not sold to solve the illiquidity woes. They aren't down and out yet.

by IT GUY | 21st Mar 23, 11:00am 1679349621

Plenty of stress in the CMBS market for sure. Every FED rate rise just adds to the pain.

by Three Veg | 21st Mar 23, 10:47am 1679348857

Again, why shouldn’t I be able to open an account at the the RBNZ and have an overnight deposit, at the the OCR, essentially risk free?

I wouldn’t expect any normal retail bank services. I can bank somewhere else for those.

by Rob Reid | 21st Mar 23, 10:52am 1679349130

That is basically what the CBDCs will be.

But it's not an enticing way to save for those of us that expect fiat currencies to inflate to valueless. CBDCs will just be fiat derivatives because govts/central banks will give themselves the power to create more tokens - it's the only real power they have left these days.

by rastus1 | 21st Mar 23, 11:37am 1679351824

Gentle reminder for some and for others who won't know this -

Under OBR, a portion of creditors’ claims may be frozen to absorb losses.

i.e you cash deposit.

Open Bank Resolution - Reserve Bank of New Zealand - Te Pūtea Matua (rbnz.govt.nz)

by DTRH | 21st Mar 23, 1:25pm 1679358356

The wheels are coming off the USD other countries are seeing weakness and know US can’t pay debt, if the FED lowers OCR inflation will run high as USD loses value. China Russia and Saudi Arabia could start a new market outside dollar, gold and silver will skyrocket so much debt in system i can only see a massive reset coming.

by HW2 | 21st Mar 23, 2:04pm 1679360689

Commodities prices are much lower than one and two years ago, a higher USD will not make the wheels fall off. But the method of controlling inflation by manipulating the OCR/fed funds rate is one dimensional and so 1990s.

It looks like central banks think that the wealth effect is the only thing that pushes or reduces demand and drives inflation.

Central banks have done well managing debt levels as a percentage of housing values. You can count the number of mortgagee sales on your fingers and toes which for this stage in the economic cycle is amazing.