Erik Weijers, a month ago

The banking crisis is unfolding in slow motion

It has been more than six weeks since Silicon Valley Bank had to be shut down. Much to everyone's surprise, the banking system hasn't seen large trouble since. So, was it all much ado about nothing? There are clear signs that the banks are suffering, which is bad for the economy. 

Currently, we don't have signs that there are US or EU banks on the brink of collapse. There are no bank runs. But there are 'bank walks'. Slowly but surely, week after week, banks witness large deposit outflows. See this thread of analyst Jim Bianco for the numbers. He notes that it's not just the small banks that see deposit outflows: the large banks have even higher percentage outflows. 

Why do people withdraw money from their savings accounts? Because banks only pay up to 0.5% on deposits. Treasuries and money market funds can yield around 4.5%. In the current online banking environment, it's easy to move some money with a mobile banking app. Gone are the days when a person was more likely to divorce than to change bank accounts... 

Why don't banks raise interest rates for their depositors?

A large chunk of the banks' assets is based on what they loaned out before 2022. At those times, interest rates were much lower. And the so-called maturity of these loans is long, so banks are stuck in these positions. Remember that banks were selling mortgages in 2021, at fixed interest rates of 2%. They could not be a profitable business if they would currently offer depositors 4% on their savings account! 

So, the banks have no choice but to keep rates low and hope that not too many clients walk away. Economists and policy makers can only hope that this won't turn out to be more than a 'bank walk' and not a bank run. Only when the Federal Reserve will start cutting interest rates will banks have some breathing room - they will face less competition from money market funds. But that won't happen soon: the Fed is expected to once more raise interest rates with a quarter percent on May 3. 

What will be the effect on the economy?

A banking crisis is deflationary. When banks lose deposits, as is currently happening, they will have less room to lend out money. The smaller banks especially suffer from the current crisis. They lend out to local businesses, such as restaurants and smaller construction firms. If these companies don't have access to credit, the economy will suffer. 

The silver lining? The deflationary effect of this smoldering banking crisis will at some point force the American Central Banks' hand. It will be forced to cut rates and 'switch on the money printer' to stimulate the economy. That will help prices of stocks and... crypto. 

See also this article in the Wall Street Journal: Why the banking mess isn't over.

Featured articles
Four trading strategies for crypto
Bitcoin and Ethereum: what are the differences?
What determines the Bitcoin price?
Related articles
Ripple acquires Metaco and has plans for a CBDC platform

May 19, 2023

Ripple is still fighting the SEC in court over the question of whether XRP is a security or not. While it is expected that the lawsuit will come to an end this year, the company is making big moves on the international market. Recently the company acquired Metaco, one of the big players in institutional custody solutions for digital assets. The deal fits perfectly into the bigger picture. Ripple has always focused on providing solutions for international payments and remittances. Solutions that are meant for institutional customers and not retail clients.

Trade anytime, anywhere

Boost your trading impact and reaction time in over 80+ cryptocurrencies via instant access to your portfolio with the LiteBit app.

App Store
Google Play Store
  • 2525 Ventures B.V.
  • 3014 DA Rotterdam
  • The Netherlands
More info
  • About LiteBit
  • Support
  • Sell
  • News
  • Education
Subscribe for updates

Sign up to stay informed via our email updates

Explore popular coins
© 2023 LiteBit - All rights reserved