Actionable Takeaways
-Unlike 2008, most of the large banks don’t appear to have credit problems from over-aggressive lending, and they are less at risk of liquidity draining from them than small banks. Therefore, most large banks are in decent shape.
-Smaller banks, meanwhile, aren’t out of the woods yet due to the combination of less cash on hand and significant unrealized losses sitting on their balance sheets. The majority of them, at least the publicly-traded ones, don’t have the acute solvency problems that Silicon Valley Bank had, but if they raise deposit rates to try to keep deposits then they do risk experiencing a solvency problem.
-Policymakers will be watching the liquidity situation closely at this point, and are likely to find it difficult to keep moving forward with interest rate increases and quantitative tightening for much longer. Specifically, total U.S. bank reserves probably can’t go much below the current $3 trillion level without corresponding increases in the usage of liquidity facilities.
-If the Federal Reserve is unable to keep up the combination of interest rate increases and quantitative tightening for much longer due to hurting small banks too much, despite price inflation still being above-target, then a basket of anti-dollar positions such as gold, oil, commodities, emerging markets, and bitcoin would likely benefit.