Thread by @macro_dose

Concerns over small US banks ⚠️

Something has happened since the start of the banking liquidity crisis we are all watching unfold.

It has created a scenario in which perceived risk is completely polarised within the banking world.

Let me explain 👇

Since the fall of SVB and Signature Bank we've seen a rush to ensure that 100% of deposits in both banks are backed and no one with their money in either loses their deposit

Silicon Valley Bank had 95%+ of their deposits over the $250k insurance limit provided by the FDIC for protection if banks go under

The FDIC insurance means that deposits up to $250k are deemed safe and backed, anything above is not and vulnerable in the case of a bank failure

Now, theoretically the past week's events could have led to a sale of the assets of the banks and depositors given as much of their cash back as possible, but this would mean delays, a period of time without access to funds and they may not have even got all their deposits back.

The period in which companies would not have been able to access their funds immediately would have potentially crippled large numbers of companies, especially those startups dealing with SVB (~50% of US VC backed startups)

Anyway, the deposits have been guaranteed.

But Janet Yellen, the US Treasury Secretary has since clearly stated that this 100% deposit guarantee is not applicable unless banks are deemed to be a systemic risk in the event of their collapse.

What does this mean?

Well it leaves a certain predicament.

Suddenly, the perceived risk of losing your deposit has been all but taken away from banks deemed 'systemically important' should they fail.

Now, all the risk suddenly seems to be shifted to smaller banks who don't meet the SI status.

Why would any company keep a deposit over $250k in a smaller bank?

There's seemingly very little reason to leave your money in a bank when you have the option of guaranteeing its safety, especially in a time of financial uncertainty.

So what does this mean for smaller banks?

There are worries that this leads to massive outflows of deposits from smaller banks to larger ones and that this could create further liquidity crises at banks that are not deemed 'systemically important'

Now, just to be clear this two tier system isn't new; it's just being thrust into the limelight because of current events.

The idea of systemically important banks has been around since the fallout from the Great Financial Crisis

But now that we have seen these large bank runs and Yellen has said that the deposits of smaller banks are not guaranteed, the perceived risk right now is greatly amplified.

And as a result, there are worries contagion may spread to smaller US banks that don't have a safety net

And it seems that larger banks in the US are already seeing deposit inflow effects of this

ft.com/content/2b5809…

No one knows exactly what is going to unfold

But it certainly won't be boring

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Yellen on deposit guarantees👇

https://twitter.com/unusual_whales/status/1636675744767291393?t=rxHTB1DfRNwDAyPX76vuUQ&s=19

#SiliconValleyBank #SignatureBank