1/ ANOTHER 🧵 ON A KEY QUESTION: astute thinkers are asking why community banks matter & how widespread this panic cld become. Dunno--but it *cld* spill over to big banks. One scenario: if FDIC depletes its insur fund, it borrows from US Treasury--which relies on primary dealers.
2/ Many people are saying big banks are safe bc they hedged the interest rate "gap risk" that is now plaguing community banks + they've had fewer deposit withdrawals. Yes, short-term. But here's the scenario:
https://twitter.com/CaitlinLong_/status/1634249490902179840?s=20
3/ FDIC insurance fund at 12/31/22 had $128.2bn (per @FDICgov). FDIC can borrow up to $100bn from the US Treasury if it ever needs additional funds. 2 issues:
a) US debt ceiling limit could come into play, &
b) US Treasury relies on primary dealers to handle US Treasury auctions
a) US debt ceiling limit could come into play, &
b) US Treasury relies on primary dealers to handle US Treasury auctions
4/ In a truly systemic run, which I'm sure policymakers have gamed out, Congress wld likely remove FDIC $100bn borrowing cap. But here's where the big banks come in--as primary dealers, they're *required* to bid on US Treasury auctions, which means they risk their balance sheets.
6/ And here's the current list of primary dealers, who *MUST* by law "bid on a pro-rata basis in all Treasury auctions at reasonably competitive prices" 
7/ So, I dunno how far this panic will go, but those who think there's a firewall between community banks & big banks are missing a key transmission mechanism: primary dealers. I'm not predicting this will go that far (no one knows). Just laying out the system plumbing. /END
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