From Tuomas Malinen’s Forecasting Newsletter.
Issues contributed:
The silent run on the U.S. banking system has accelerated, again.
The falling usage of the reverse repo facility of the Federal Reserve may trigger a shock in the financial system during the next three months.
Banking crisis was pushed below the ‘surface’ in March past year, but it may be about to re-surface.
I kept a short break past week. I drove to Lapland (Levitunturi), stayed there for three nights (went skiing, etc.) and then drove back. The drive totals around 2150km across Finland. Driving is one of the best ways to relax, to me at least, because you don’t work (do in-depth statistical analysis and/or write), when you drive. I also like driving very much. We started road-tripping, with my ex-wife, in 2005 and I’ve been doing it ever since. Our/mine best road trip, thus far, has been Route 66 (from Chicago to L.A.). What makes it so exceptional is that, if you drive 400-500km per day, the scenery always changes. The most spectacular sceneries were the high plains of Texas, New Mexico and Arizona. This is the one road-trip I plan to re-do in the future (maybe with my next wife :)).
On Friday evening, when I shortly checked X, I noticed this (figure updated on 17/01/24).
In early December, I noticed that banks had started to tap into loans of the Bank Term Funding Program, BTFP, of the Federal Reserve with growing volumes, but the first weeks of January have made it clear that this is a trend and not just some ‘blip’ in data. Growing usage of the BFTP is a worrying sign, because the BTFP is an emergency lending facility established “to help assure banks have the ability to meet the needs of all their depositors“. It was also originally planned to be temporary (ending on 11 March, 2024). Now, we can state with relatively high confidence that the program will continue into the foreseeable future.
But, what gives? Why are banks tapping into the BTFP with growing volumes, again?
The silent bank run
On September 1, I re-coined the term silent bank run. Originally, it was created to describe the run on the liabilities of the shadow banking sector between 2006 and 2008. It was “silent”, as you could not really observe it, because the collateralized debt obligations, CDOs, were traded over-the-counter. This meant that only banks and some investors knew their demand and value. When the U.S. housing sector soured in 2006, the values of CDOs, which were constructed mostly on mortgages, started to fall. This led investors (also including other banks) to shy away from them leading to “run” on the liabilities of the non-bank entities, called shadow banks, setup up by commercial banks. You can check a summary of the events from a blog published in the webpage of GnS Economics to commemorate the 10th anniversary of the failure of Lehman Brothers.
In the current version of the silent bank run, depositors withdraw their deposits from banks, but this does not manifest as bank failures, because banks borrow the outflowing money from the BTFP. The ability of banks to seek loans from the BTFP has “silenced” the ongoing bank run, but how bad is the situation now?
The silent bank run
On September 1, I re-coined the term silent bank run. Originally, it was created to describe the run on the liabilities of the shadow banking sector between 2006 and 2008. It was silent, because you could not really observe it, because the collateralized debt obligations, CDOs, were traded over-the-counter. This meant that only banks and some investors knew their demand and value. When the U.S. housing sector soured in 2006, the values of CDOs, which were constructed mostly on mortgages, started to fall. This led investors (also including other banks) to shy away from them leading to “run” on the liabilities of the non-bank entities, called shadow banks, setup up by commercial banks. Going through the mechanics of this original silent run is very technical and cumbersome (I, for example, use 15 pages to explain the Great Financial Crisis, in my book draft) and I simply do not have the space for it here. However, you can check a summary of the events from a blog published in the webpage of GnS Economics to commemorate the 10th anniversary of the failure of Lehman Brothers.
In the current version of the silent bank run, depositors withdraw their deposits from banks, but this does not manifest as bank failures, because of the BTFP. The ability of banks to seek loans from the BTFP has “silenced” the ongoing bank run. So, what is the situation with the current bank run?
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