Thread by @CoryTSkerl

The US banking system may be in a more precarious position than many are willing to believe. Undoubtedly some are willfully blind to the potential worst outcome from the events in the past few days. In my estimation the worst possible outcome is as follows:

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#SVB #SBNY

The bank run on Silicon Valley & Signature, whether or not justified, unveiled a hidden weakness in the balance sheets of US depositary institutions: poor liquidity.

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I’m not talking about liquidity in the traditional sense, but liquidity in the face of several inconvenient assumptions which few have brought to the conversation and many have laughed off as inconsequential, not so funny now

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The composition of many banks’ balance sheets has had a marked change since the beginning of the pandemic. Beginning with historic quantities of deposits and progressing to an equally historic quantity of consumer debt. Evens out right?

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Wrong. While deposits tend to share the same general character and are easily quantifiable balance sheet liabilities, the asset base of banks has become a bit more murky, illiquid, and risky.

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Where is the risk? Let’s consider several problematic asset classes on most banks balance sheets:

- Loans
- Mortgages
- Lines of Credit
- Fixed Income Investments

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Mortgages and other consumer loans can’t possibly be problematic after the increased scrutiny following the GFC right? Well regulators have never been known for their foresight, while the issues that cause the GFC have been alleviated

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namely predatory lending and poor credit risk management, a new beast has taken its place: collateral valuation. Due in part to changing methodologies for calculating inflation, stimulus money, and historically low (though rising) interest rates

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Lenders have turned a blind eye to the abysmal collateral base underlying their massive books of asset backed loans. That house that sold for $1M but wasn’t worth $600k.. well turns out it certainly wasn’t worth $1M but, like in 2008 the buyer won’t be left holding the bag

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It’s no secret that credit card debt has reached historic levels and consumer income has not increased sufficiently to offset, this debt bubble is large and is bound to pop,

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Running out of steam on this thread, but basically same game different story #SVB and #SBNY have already unsettled Americans enough to drive many to the ATM or banking app tomorrow to withdraw some of their funds, a “mini” bank run will force asset sales and the..

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thin veneer of a healthy balance sheet will begin to crumble as the “true liquidity” of an asset base backed by historically inadequate collateral takes center stage and the next phase of the cycle begins.

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I truly hope I’m wrong, but something smells and it’s not Jerome Powell’s feet.

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