The significance of banking contagion spreading to Credit Suisse

I’ll keep this short and assume you’ve read about what’s happening at Credit Suisse. To get up to date, you can read about it here.

The stress at CS worries me for two reasons. First, it’s a more systemically important bank than SVB. Second, this means that loss of confidence in the banking system has spread across the Atlantic to Europe. No longer is it contained to American regional banks.

The problem is not that CS is insolvent (yet). The problem is that depositors are pulling their assets in droves (they lost $100B in deposits in Q4) and without deposits, a bank can’t generate revenue. You see, people are now coming around to the idea that putting your money in a bank isn’t as good of a deal as they thought it was. Deposit rates are well below what you get in a money market account or Treasury bills, and as recent events have proven, you don’t even know if your money is safe.

As a result of this “awakening”, we are undergoing a process where assets and deposits are moving from weak to strong banks. From uninsured deposits to FDIC insured. There’s one problem with this. Fractional banking means that no bank, not even the strongest banks, can withstand a serious bank run. What happens in a situation where all the deposits end up in FDIC insured deposits or GSIBs (Global Systematically Important Banks, aka Too Big To Fail)? Where is the backstop then?

Here are some numbers:

Size of the FDIC Insurance Fund: $128B

All FDIC Insured Deposits: $262B

All uninsured deposits in the US: $1 trillion

FDIC has less than half the funds to cover the deposits they have promised to insure. The government doesn’t have enough money to backstop even a fraction of the $1T in uninsured deposits. If the unmet liabilities of the banking system exceed the capacity of FDIC and the government to backstop them, the only way to prevent a collapse of the financial system would be to print money, just like they did in the Great Financial Crisis.

I’m not saying this will happen overnight. It may take years for this to play out. The difference between today and the GFC is that the epicenter of the GFC was the investment banks holding all those risky mortgage bond portfolio and derivatives. Most of the money lost belonged to institutions. Nobody with their savings at their regional bank was worried about losing their money.

This time it’s different. The average person on the street is looking at where they keep their money and trying to figure out whether it’s safe. The fear is viral and is spreading at a rapid pace. Last week it was SVB, today it was CS, and tomorrow it could be a large bank in Canada or Japan. Banks are fearful too. Bank credit was already falling off a cliff before SVB went under, and now banks will be even more afraid to lend because they don’t know if their depositors will still be around in a year. A deeper contraction is already in the pipeline and will accelerate the onset of recession, which may result in a vicious feedback loop that brings down more banks.

If you have a private banking account at JP Morgan, your money is probably safe. However, your dollars at JPM are not safe from the massive amount of money printing that would be required to bail out the depositors at all the other banks that may go under. All participants of the fiat banking system will pay the price, some heavier than others. The only place to hide is in hard assets and stores of value, such as gold and BTC (and to a lesser extent, ETH). Readers know I’ve been long gold for a while, and I still like it more than ever. I also turned bullish crypto again on Sunday, before the big runup in ETH and BTC. This was highlighted in the paid section of my post. I went long ETH at 1486, but I’m switching into BTC at a conversion rate of 0.0671 because it’s a superior store of value.

Anyway, it’s 2 AM and time to get some sleep. To receive my best content and to follow what I’m doing in my personal portfolio, you can upgrade to a paid subscription. I’m offering a 33% discount until April 15.

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