What a day: the 'non-systemic' collapse deepened systemically as the Fed's balance sheet jumped with 'not-QE'

On Friday 17 March 2023, one week after Silicon Valley Bank became the second-largest bank failure in American history, the day’s events were these. Eleven of the largest banks in the country deposited 30 billion dollars in First Republic, a competitor, in an arrangement Reuters reported was orchestrated by the chief executive of JPMorgan with the Treasury Secretary and the Fed chair. The Swiss National Bank promised Credit Suisse a 50-billion-franc lifeline as a “systemically important bank”. The Pentagon, it emerged, had mobilised staff in the hours after Silicon Valley Bank closed to protect the defence startups that banked there. And the Federal Reserve’s weekly balance-sheet release showed an increase of about 300 billion dollars, undoing nearly half of the reduction it had achieved over the previous year. Every official involved said the situation was not systemic, the deposits were not a bailout, and the balance-sheet expansion was not quantitative easing. This page kept the day, and the three denials.

A Depression-era rescue

The First Republic arrangement had no recent precedent. The closest was 1907, when J. P. Morgan the man locked the leading bankers of New York in his library until they agreed to pool funds to stop a panic. His firm’s current chief executive, Jamie Dimon, played the same part, with Janet Yellen and Jerome Powell beside him. The 30 billion arrived on top of First Republic’s 34 billion in cash, 109 billion it had borrowed from the Fed’s discount window between 10 and 15 March, and 10 billion from the Federal Home Loan Bank. Its shares fell again anyway. When that much money is not enough, this page observed, the word for the situation is the one everyone was avoiding. Art Cashin, the veteran floor trader, told CNBC the market was “on the edge of what we were doing back when Lehman got in trouble”.

Credit Suisse

Credit Suisse’s troubles went back to the last crisis, and the Swiss backstop did not reassure anyone either: its credit-default swaps, the price of insuring its debt, went near-vertical the moment the American failures began, and its funds saw 450 million dollars of outflows in three days. A central bank can supply cash. It cannot supply confidence, and a fiat banking system runs on nothing else.

Not systemic

The former FDIC chair said one “could hardly call it systemic”. The Treasury Secretary’s message, as CNN’s panel summarised it, was that there was “not systemic risk in the system”. A commenter quoted here observed that Silicon Valley Bank had been described as an isolated case of bad management, and that a second bank with the same problem had failed since. The Pentagon’s mobilisation was reported the same morning. Whether the failure of a bank whose depositors include the country’s defence-technology startups is systemic is a question that answers itself once the Defense Department is asking it.

Not a bailout, not QE

The depositors of Silicon Valley Bank and Signature had been made whole above the insured limit by a “systemic risk exception”, invoked by the same officials who said the risk was not systemic. The Fed’s new Bank Term Funding Program lent against bonds at their face value rather than their market value, which was the difference between solvency and insolvency for any bank that had bought long bonds at 1 per cent yields. And the balance sheet, which the Fed had been shrinking at 95 billion a month, rose 300 billion in a week through the discount window and the new facility. The Fed said it was not QE because the loans were temporary. The distinction mattered to the Fed’s credibility and to nothing else: money lent against underwater collateral at par is money created, for as long as it is out.

What the day showed

The banking system in March 2023 was not the one of 2008. Its problem was not bad loans but good bonds bought at the wrong price, and the wrong price had been set by the Fed itself, first by holding rates at zero and then by raising them faster than at any time since 1980. The rescue was, in that sense, the Fed rescuing the banks from the Fed. The three denials were the sound of an institution unable to say so.

Later note. First Republic failed six weeks later, on 1 May 2023, and was sold to JPMorgan; Credit Suisse was forced into UBS two days after this page was written; Signature Bank’s failure had already made it the third-largest in history. The Bank Term Funding Program lent 165 billion dollars before closing in March 2024. No further banks of size failed, and the “not systemic” reading, applied to the system as a whole rather than to the three banks, has so far held.