According to research from Coinbase and CES Insights, the U.S. government has taken swift steps to avert a system-wide bank run among mid-tier banks after the failure of Silicon Valley Bank (SVB) and Silvergate.
Once First Republic Bank secured $30 billion in backing on March 16, the study says that the danger of contagion has been mitigated.
Coinbase sees certain dangers to liquidity
According to Coinbase, the Bank Term Financing Program (BTFP) established by the Fed allows financial institutions to value their bond portfolios at cost rather than marked-to-market, presenting itself as one liquidity hazard banks possess.
The BTFP is offering a 1-year OIS+10bps (overnight index swap) fixed-rate loan to banks that will be secured by bonds (U.S. Treasuries, mortgage bonds, etc.) purchased by these U.S. banks before March 12. JP Morgan estimates that the maximum consumption might be close to $2 trillion outside the five biggest banks.
Other factors, such as banks’ reluctance to extend new loans or acquire debt for fear of seeing their asset-liability mismatches worsen, are also mentioned in the study as potential threats to market liquidity.
Clients of financial institutions may shift more of their savings from deposits to money market funds, which would decrease banks’ reserves and limit their ability to lend. The concentration risk of the financial system could also rise if depositors shifted their money from more minor to larger banks.
What should we expect next?
According to the data, the Fed faces a broad range of potential outcomes, depending on how they interpret current events. A rise in concerns about Credit Suisse and First Republic Bank suggests that the Fed may be changing its mind about whether or not the events at SVB are systemic.
Clearly, the worries about Credit Suisse were well founded.
Even if the predicted terminal rate is lower today – potentially in the 5.25-5.50% range – they still see the third route as the most plausible since core inflation still seems stable and the economic data elsewhere indicates strength.
The positive medium- to long-term forecast for cryptocurrency is also highlighted in the paper.
Although inadequate risk management procedures contributed to the volatility seen in the U.S. financial industry this week, the technology behind open, trustless blockchains and transparent intelligent contracts stands in striking contrast.
In other words, it bolsters the most basic arguments in favor of digital assets as a replacement for and fixes for the flaws in the current monetary system.
Increased trading volumes may be attributed to the events surrounding Silicon Valley Bank and USDC. When investors rushed to safer assets, the proportion of BTC held by dealers climbed to over 44%.
Traders are preparing for a return of the cheap money policies that fueled the last crypto bull market after the data implies a likely Fed pause or possibly rate reduction (once again priced in 2H23). Net purchases on Coinbase Institutional came from conventional and crypto-native hedge funds, traditional asset managers, and private wealth.
With bitcoin’s recent surge in value, miners have been selling faster than usual.
The analysis concludes that the aftermath of the SVB issue may have far-reaching effects on the banking sector and market liquidity. The Fed needs help selecting its next moves, with a broad range of potential outcomes.
Despite this, the analysis bolsters the case for digital assets as an alternative to and a fix for the flaws in the current financial system.
