The Fed and the banking risks

The Fed meets tomorrow, and today the banking situation is getting more and more tenuous. Over the weekend First Republic Bank went under. There was no way to slow the deposits from exiting. Today, the S&P regional bank ETF is down -7.14%. Yields are sharply lower. The Fed Funds contract for January of next year is implying 4.40% which is down from 4.6% yesterday.

Gold is a beneficiary up $34 or 1.72%. Bitcoin is steady (so far)

The Fed is expected to raise rates by 25 basis points, and that has people worried. Why? Recall that SVB went under largely because of the rise in rates. That fear is in peoples minds whether it is real or not for the other regional banks (or any bank). The modern mean of technology that allows for the transfer of funds in the matter of hours from those concerned depositors raises the risks for it to happen, just because "it can". A bank that has a pool of deposits, can see billions and billions disappear quickly. Admittedly, deposit insurance is there to try and stop the fear, but fear is a strong influence for behavior. It took a Peter Thiel tweet to start the downfall of SVB as depositor sent in withdrawal requests. It can happen at any bank.

What is the risks all of sharply lower deposit base for a bank or banks.

1. Reduced lending capacity: A significant portion of a bank's deposit base is used to provide loans to individuals and businesses. If the deposit base shrinks, banks will have less money available for lending, which could negatively impact their profitability and the economy.

2. Increased borrowing costs: To compensate for the loss of deposits, banks may need to rely more on borrowing from other sources, such as the central bank or other financial institutions. This could lead to higher borrowing costs for the bank, which might be passed on to customers through increased loan interest rates.

3. Loss of confidence: A substantial decrease in a bank's deposit base could signal financial instability and erode the trust of customers, investors, and other stakeholders. This loss of confidence may further exacerbate the issue, as more customers withdraw their deposits, creating a vicious cycle.

4. Reduced liquidity: As the deposit base diminishes, banks may struggle to maintain adequate liquidity levels. This could limit their ability to meet short-term obligations and cope with unforeseen financial shocks.

5. Regulatory intervention: Banks are subject to regulatory requirements, such as maintaining a minimum level of capital and liquidity. If a bank's deposit base shrinks significantly, it may fail to meet these requirements, leading to intervention from regulators. This could involve penalties, restrictions on business activities, or even the possibility of a forced merger or acquisition.

6. Potential bank runs: In extreme cases, widespread withdrawal of deposits can lead to a bank run, where a large number of customers attempt to withdraw their deposits simultaneously. This can cause severe liquidity issues for the bank and may even result in its collapse if it cannot secure additional funding.

With those risks, will the Fed go ahead with what is thought to be the last hike (it would get the rate to the target terminal rate)?

It is still the odds on favorite for a 25 basis point Basis point A basis point is a unit of measurement used to express the change in value of a financial instrument, such as a bond or a loan. One basis point is equal to 0.01%, or one one-hundredth of a percentage point. For example, if the interest rate on a bond increases from 5% to 5.25%, that is an increase of 25 basis points. It is often used in the context of interest rates, yield, and credit spreads. The short-hand for a basis point is bps and on a trading floor you will hear them referred to as ' A basis point is a unit of measurement used to express the change in value of a financial instrument, such as a bond or a loan. One basis point is equal to 0.01%, or one one-hundredth of a percentage point. For example, if the interest rate on a bond increases from 5% to 5.25%, that is an increase of 25 basis points. It is often used in the context of interest rates, yield, and credit spreads. The short-hand for a basis point is bps and on a trading floor you will hear them referred to as ' Read this Term hike, but if the Fed is getting more and more concerned about the banking system (and the protentional for more of the above happening from bank to bank), they might sit aside. They could argue that there will likely be lower lending at banks and that will lead to lower growth and inflation down the road (and explain it without raising banking fear. In reality any of the above list is deflationary).

Then the Fed The Fed "The Fed" is a short-hand that refers to the Federal Reserve or Federal Reserve System, the central banking system of the United States. Traders often discuss the actions of the Fed, primarily interest rate decisions, as they significantly impact all financial markets.The Fed shouldn't be confused or substituted with the term "the Feds" and doing so tells everyone you're a total noob. The term "the Feds" refers to US Federal law enforcement, including such agencies as the FBI (Federal Bureau of "The Fed" is a short-hand that refers to the Federal Reserve or Federal Reserve System, the central banking system of the United States. Traders often discuss the actions of the Fed, primarily interest rate decisions, as they significantly impact all financial markets.The Fed shouldn't be confused or substituted with the term "the Feds" and doing so tells everyone you're a total noob. The term "the Feds" refers to US Federal law enforcement, including such agencies as the FBI (Federal Bureau of Read this Term will hope that the fear risks disappears again, banks maintain their deposit base without sharp withdrawals that have the potential to lead to rolling bankruptcies, just because deposits get sucked out of the latest "at risk" bank. Now, the chance of that may be small (there is FDIC insurance after all and other guarantees that government can add), but after the sharp run up in rates already, will the Fed want to chance it? Will the Fed want to test a move of all non needed funds into gold, bitcoin, money market funds or treasury bills.

In the meantime, this might be the best hedge.