It has been a tumultuous several weeks in the world of finance. Just when “soft landing” (i.e., the notion that Fed rate hikes would tame inflation without causing a nasty recession) was the meme, a string of banks went belly-up. We summarized the history and status of this dismal parade of corpses a week ago.

On Friday, Germany’s Deutsche Bank (DB) was added to the list of endangered financial species. Its share price plunged as the cost of insuring its credit swaps soared, a sign of lack of confidence in DB among other financial parties. As best I can discern, however, DB is a relatively poorly-managed bank, but not one teetering on insolvency like Credit Suisse or the smaller American banks that have collapsed.

Silicon Valley Bank Getting Sold Off, Finally

On this side of the pond, the big news is that Silicon Valley Bank (SVB), whose spectacular implosion was really what brought “crisis” to banking, will be taken over by another regional bank, First Citizens Bank of North Carolina.  The first attempt to auction off SVB was a fizzle, so the feds tried again. They really, really wanted to get this kind of full takeover deal done (rather than breaking up SVB and selling off bits piecemeal), so First Citizens was able to drive a juicy bargain. First Citizens was a fairly modest-sized bank, about half the size of SVB at the end of last year. First Citizens will get SVB assets of $110 billion, deposits of $56 billion and loans of $72 billion, and will start operating the SVB branch offices again.    They will pay only $55 billion for the nominal $72 billion in loans that SVB had made, a 29% mark-down. The cost to the FDIC for this deal is about $20 billion. (I don’t know how First Citizens is paying for this acquisition). First Citizens stock skyrocketed on this news, so the market sees this as a sweet deal for First Citizens.

Going forward, the FIDC has pledged to share any losses (or gains) on those loans in the future, which offers further protection to First Citizens. FDIC gets shares of First Citizens valued up to $500 million. First Citizens decided not to take an additional $90 billion in securities that the FDIC will now have to sell on its own. These are likely the long-term bonds which sunk SVB when their value cratered with rising interest rates this past year. I’m not sure how much further losses the FDIC will bear on these bonds.

Anyway, so far, so good, kind of; it is sobering to note that this $20 billion cost to the FDIC just chewed up 1/6 of its total $128 billion kitty for backstopping all qualifying deposits at all banks in America. So we can’t readily afford too many more meltdowns of this magnitude.

Bank Deposits Continue to Flee, But Slower

A worrisome trend in the past month or so has been for depositors to pull their funds from bank checking/savings accounts, and stash their money instead in higher yielding money market funds or CDs or Treasury bills. Banks have borrowed records amounts from the Fed in recent weeks, in order to have lots of cash on hand if they have to pay off departing clients. And within the banking system, about half a trillion dollars has been moved from smaller regional banks to large banks.

I can’t find the reference now, but in the past two days I read an article stating that rate of deposit withdrawals is slowing down, and will likely not of itself destabilize the system. I’m going with that narrative, for now.

An indirect fallout from all this bank turmoil is the reduced inclination of banks to extend loans to businesses. This will make for a slowdown in economic activity, which should cool off inflation – -which is exactly what Jay Powell was hoping would be the outcome of the Fed rate hikes.