Reflexivity

Published on December 11, 2023 by Premium

A sharp decline in interest rates in benign economic conditions opens up the possibility of a re-acceleration in economic activity that would limit the number of future Fed cuts. One mechanism through which higher interest rates slow the economy is through reduced lending, where higher rates discourage borrowers and prompt lenders to retrench on credit concerns. Despite an aggressive rise in rates, a wide range of measures on credit quality show only modest deterioration to

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Neutralizing QT

Published on October 30, 2023 by Premium

The rapid decline in the Fed's RRP facility has not impacted financial conditions, but will eventually provide a modest degree of easing in the coming months. RRP balances have declined by almost $1.1t since June largely due to significant bill issuance, which financed a $800b increase in the Treasury General Account. The balance of the decline went into commercial banks and vanished through QT. With net bill issuance set to increase, the RRP may approach

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Dollar Deleveraging

Published on September 5, 2023 by Premium

Higher dollar interest rates appear to be prompting a deleverging of the off-shore dollar banking system that that may presage an extended period of poor global growth. Unlike domestic banks, foreign banks do not have a broad retail dollar deposit base and must fund their dollar assets at money market rates. The squeeze on bank profitability seen in smaller domestic banks is thus magnified for foreign banks and appears to be contributing to a reduction

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Asset Neutral

Published on July 24, 2023 by Premium

Net interest margins for many banks remain healthy, but have notably shrunk as deposit funding costs rose more quickly than anticipated. The first aggressive hike cycle in decades is revealing widely held assumptions on deposit behavior to be false. The surprising rate sensitivity of deposits appears to be due to both aggressive loan growth in the preceeding years, as well as a persistent reduction in system wide deposits via quantitative tightening. However, the largest banks

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Reserves and Asset Prices

Published on June 5, 2023 by Premium

A rapid decline in bank reserves is a headwind to all asset prices, but it need not be significant. In our two-tiered monetary system, a decline in bank reserves means both banks and non-bank investors have less cash and thus potentially less demand for financial assets. Banks may have less demand for high quality liquid assets like Treasury securities and non-bank investors may have less demand for riskier assets. In addition, while a decline in

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All Clear

Published on April 24, 2023 by Free

A wide range of data and commentary indicate that both the banking panic is over and that it had only a limited impact on credit availability. The March panic was fundamentally a problem of a few poorly managed banks and not a crisis. Investors are no longer running to money funds and now appear comfortable again with the banking system. Overall bank lending activity was little changed in March and continues to grow in April.

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Primer: A Deposit’s Life

Published on April 10, 2023 by Free

This post illustrates how banks deposits can be created, transformed, and destroyed. Banks deposits are the numbers in one’s bank account and the most common form of money. They are just digits in a bank’s database that are created when a bank makes a loan or buys an asset, and erased when a loan is repaid or when a bank sells an asset. They can also be transformed into other bank liability types when a

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Hidden to Market

Published on March 13, 2023 by Free

There is little risk of a crisis in the banking sector, but that does not mean there aren’t badly run banks. QE and Basel III have made the banking sector significantly more liquid and resilient such that a replay of the GFC is very unlikely. However, individual banks under poor management can still be subject to bank runs. At a high level, a bank has short-dated liabilities and longer dated assets. A well managed bank

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Credit Boom

Published on January 9, 2023 by Free

A tremendous credit boom took place in 2022 and it may not even be over. The combination of healthy banks, financially strong households, and attractive rates appears to have to led to a surge in bank lending. Banks and credit unions together created $1.5t in cash last year that likely has not yet fully filtered into economic activity. Recall, bank lending creates money out of thin air. Interestingly, higher interest rates have so far only

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Breaking The System

Published on March 7, 2022 by Free

The banking system is built on trust that the money one places in the care of others will be there when needed. This is as true for the retail investor with deposits at the local commercial bank, as it is for the sovereign with FX deposits at a foreign central bank. Hard earned trust is part of the magic that enables developed market sovereigns to massively deficit spend with limited consequence. The world happily holds

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