RE: Standard Chartered Blames Gamma Hedging For Overdue Oil Selloff27 Mar 2023 13:08
It is really difficult to fathom what is happening with the banks. Everything seems to be clouded in opaque terms, derivatives change names, complex derivatives are piled on top of existing derivatives, policies are explained in terms as easy for the punter to understand as how to untie the Gordian Knot - the last thing the banks want you to know is that you simply cut it!
The traditional thinking with banks that interest rates going up is good for shareholders as there is more leeway for advantageous lending & generally making money seems to have faded.
My take on the latest banking crisis is that following the crisis in 2008, Central Banks insisted on new higher recapitalisation ratios for banks. There seemed to be universal agreement on this so that all seemed well again. Banks suddenly had lots more capital to invest, and who better than bankers (maybe this is rhyming slang), to decide on the best way to invest any surplus capital. Liquidity & cash ratios were paid insufficient attention, largely because they inversely impact on profits - increased liquidity is a "nice to have" but it is expensive.
Recapitalisation - they seem to have done on the basis of what, following recent interest rate rises, looks to be have been largely founded on purchasing low-coupon US Treasury Bonds. At the time a cautious and conservative policy, obviously with a view to interest rates remaining relatively low for the foreseeable future. Probably not enough "what if" scenarios looked at, like what if interest rates go up significantly, or cash & instantly realisable assets are needed urgently!
Couple this with newer bond issues providing better returns & banks in an extreme liquidity emergency were left with no choice other than to sell their existing " bonds" at a significant loss. Harness this with the vagaries, and savage decline in company valuations associated with the Tech lending specialism of Silicon Valley Bank & it has disaster written all over it.
Now though the Fed seems to have stood firmly as the backer behind all US Dollar lending. The following is an extract from the Fed website, under Policy Tools:
Central Bank Liquidity Swaps
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank maintain standing U.S. dollar liquidity swap line arrangements to enhance the provision of U.S. dollar liquidity.
These facilities serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad.
My money would be on one or two peripheral & less significant bank failures, but the main systemic banks being safe, or at least as safe as the US Fed. It looks like Jack has been put back in his box for now! Will there be future bank crises - yes, you can bet your life on it. Will this one take time to calm down i
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