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  • tanaynagarsheth1

Too Big to Fail

In 2023 Three major US banks have collapsed, (SVB, First Republic & Signature Bank - all with Total AUM of 532B), US Feds increase the interest rate to a 22-year all-time high, De-Dollarization by BRICS.

All of these signaling a recession by 2024

1. Three Major US Banks Collapsed: Series of Uninsured Deposits

It started with corporate deposits during pandemic by startups as they were cash rich with funding of all sorts, which led to SVB’s asset size grow exponentially and since Banks need to park their money at different financial instruments to earn between borrowing and lending rate, SVB decided to buy some U.S. treasuries and government-backed mortgage securities. With inflation increasingly rapidly and FEDs constantly increasing interest rates thus causing a lag in inflation, SVB was forced to sell-off bond portfolio worth 21B$ to meet ongoing demand from withdrawal requests. On 9th March 2023 there were 42B$ deposits withdrawn on single day (causing bank run).

To give perspective this collapse has been as big as 2008 subprime mortgage crisis (745B$ as of today, adjusted for inflation), but eventually learning from the past FDIC came to rescue these bankrupt banks using FDIC’s deposit insurance fund.

  • SVB : Silicon Valley Bank with Assets worth 209 B$ (by end of 2022) was sold to North Carolina Bank and SVBUK was sold to HSBC UK, the sale took place on weekend so bank is functional on Monday for depositors to access their funds. Fed Chair Jerome Powell, Treasury Secretary Janet Yellen and FDIC Chair Martin Gruenberg came to the rescue to ensure shareholders and taxpayers don’t recoup losses, and depositors were covered by FDIC’s deposit insurance fund. Fed also created Bank term funding program to protect institutions impacted by crash of SVB

  • Signature Bank : Signature Bank with Assets worth 110 B$ (by end of 2022) was shut down by federal regulators by 12th March, 2023. It was part of the domino effect from SVB collapse. It started with Signature reducing its exposure in Crypto in late 2022 and peaked with SVB collapse as depositors started to withdraw funds, most of these funds had exposure in crypto; which in turn was low in value because of FTX collapse (Sam Bankman-Fried caught in Bahamas). FDIC concluded that 90% of all its deposits were uninsured. Any depositor of Signature Bank is now depositor of Flagstar Bank as Signature Bank is owned between Flagstar Bank & Signature Bridge Bank, Fed regulators said Signature Bank customers would get all deposits back, even amounts over $250,000 that are uninsured by the (FDIC), as part of Deposit Insurance Fund.

  • First Republic Bank : First Republic Bank with Assets worth 213 B$ (by end of 2022), second largest bank by assets collapsed only to be sold to JP Morgan Chase & Co. , after the SVB collapse . It had seen a large outflow of funds as depositors rushed to pull their money and park it in institutions they viewed as safer. Their shares dropped by 75% in a week as they issued a statement addressing on borrowing heavily from Federal Reserve (last resort for any bank), this was second largest collapse since Washington Mutual (2008), the bidders of this failed bank were Bank of America, JP Morgan & PNC Financial Services. About 67% of First Republic’s deposits were uninsured.

2. Feds increase the interest rate to a 22-year all-time high

The Feds increased interest rate by .25% to its all-time high, a record since 2001 in the hope to beat inflation. One more rate hike is expected to follow contractionary monetary policy and open market operations, this will help them achieve 5.25% to 5.50% target fed fund rate to achieve maximum employment and target inflation rate of 2%, after which they are likely to follow an expansionary monetary policy.

3. De-Dollarization: BRICS

After Second World War, dollar was pegged with gold reserves and crowned as the world’s principal reserve currency, but in 1971 gold reserves declined and led to the system being decoupled.

A few years later, US Secretary of State Henry Kissinger visited King Faisal of Saudi Arabia to broker the petrodollar system. The United States agreed to provide military support, and, in return, the Organization of the Petroleum Exporting Countries (OPEC) would denominate oil globally in US dollars. This created synthetic demand – countries buying oil would need US dollars – which in turn enabled US dollar primacy

Later in 2021 Russia-Saudi signed a military cooperation agreement, thus removing Saudi’s dependency on US for military support. In 2023’s World Economic Forum – Saudi announced its intentions to trade in currencies apart from the dollar, thus marking the start of de-dollarization.

Historically US has bullied countries with sanctions & trade wars using dollar as its weapon. Biggest global recessions trace back to the screwups in US financial system, be it 2008 subprime mortgage issue or the Great Economic Depression. Tired of dollar dominance in trade, BRICS has decided to bring in their own reserve currency.

From what the word is going around, the BRICS developed currency will be backed by gold reserves – coming a full circle in currency trade.

Recently, 40 countries have sent proposals to join BRICS from which United Arab Emirates, Saudi Arabia, Iran, Egypt, Argentina and Ethiopia have been accepted. Together the BRICS accounts for 46% of world population &30% of Global GDP. As the reliance on US dollars diminishes, central banks will begin dumping their dollar reserves. This will result in hyperinflation, a spike in interest rates to compensate for the loss of purchasing power, and falling asset prices, further accelerating US decline. The trend of de-dollarization is occurring – but it is not something unique. The rise and fall of empires and reserve currencies are apparent throughout history. There will inevitably be a shift in the world order, and it may well be the BRICS’ time.

 

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