The WSJ journo, Nick Timiraos, is considered by many, including yours truly, to be the unofficial mouthpiece spokesman for the Federal Reserve Board policymakers.
From the Wall Street Journal, April 24:
Deposit flight and higher funding costs risk squeezing small businesses beyond big cities
The panic phase of the past month’s banking crisis may be ending. The big question now is how much of a hit the economy faces from any lending pullback. The answer may not be clear for months.
The failures of Silicon Valley Bank and Signature Bank one month ago disrupted an already fragile equilibrium because many banks hadn’t raised deposit rates as the Federal Reserve aggressively lifted short-term interest rates to fight high inflation.
Depositor runs on both banks led customers at other small or regional banks, including corporate treasurers that maintained large payroll accounts, to question whether they should move uninsured deposits to the big money-center banks that are subject to tougher regulation.
So far, bank earning reports last week showed regional lenders, assisted by a quick and extraordinary government response that implicitly backed all uninsured deposits, have stanched the most severe outflows. Quarterly figures from First Republic Bank, whose shares were hardest hit last month, are due to be reported Monday. They will be heavily scrutinized for signs that the worst of the current turmoil has passed.
But a slow-and-steady erosion of deposits at small and midsize banks could continue now that longtime consumers have awakened to the potential to earn more on their money by moving it to money-market mutual funds.
Higher funding costs for banks will squeeze profits. Economists at Goldman Sachs estimate every 10% decline in bank profitability reduces lending by 2%. If the share of Fed interest-rate changes that are passed on to bank deposit rates, sometimes called “deposit betas,” reach levels seen in 2007—the last time the Fed raised rates close to current levels—that could lead to a 3% to 6% decline in lending in the U.S. Goldman expects that could reduce economic output by 0.3 to 0.5 percentage points this year.
The bank’s economists see reasons why deposit betas could be higher than in previous cycles. The speed of recent Fed rate increases may have made inattentive customers suddenly notice higher-yielding alternatives. Mobile banking also has lowered the cost of moving deposits between banks, increasing competition.
Deposit rates tend to peak around two to three quarters after the Fed stops raising its benchmark federal-funds rate, which suggests that they could continue to rise through the end of this year. Fed officials have signaled they are likely to raise the fed-funds rate at their meeting May 2-3 to just above 5% before entertaining a pause........The current bank crisis “is in the second or third inning, not the seventh inning,” said [former Dallas Fed head] Mr. Kaplan. He thinks the Fed shouldn’t raise interest rates until it has a better view of the fallout, particularly because it would be damaging to have to cut rates later this year to address a bigger crisis. “I’m afraid we’ve got something coming that we don’t fully understand,” he said....
....MUCH MORE
Earlier today: Bank Earnings: First Republic Was Rescued By Jamie Dimon et al; How Bad Off Was It? (FRC)
Now I know we are on record saying Silicon Valley Bank would not lead to system-wide failures (granted with a remedial fallback) but why is a former Federal Reserve Bank President being so honest? With The Fed Whisperer?
Is Silicon Valley Bank The Canary In The Coal Mine? (SIVB)
Nah.
In the same way that Northern Rock wasn't the canary in September 2007.
It took almost a full year before the Great Financial Crisis made itself known to the masses.
However, should this analysis prove incorrect, we have on offer in the museum gift shop:
This device was used to resuscitate canaries in coal mines
....MUCH MORE at Manchester's Science + Industry Museum via MuseumCrush.
