I suppose it is only natural for the media to follow the exciting stuff re the demise of Silicon Valley Bank (SVB). Possible bank runs, Joe Biden saying we will protect all depositers at US banks, falling share prices and little Rishi saying calm down dears, our banking system is wonderful.

But for the most part, media and other commentators are missing the most important development, post SVB, although good to see the Hound touch on this on Monday, and that is the Fed’s creation of the innocuous sounding mouthful, the Bank Term Funding Program (BTFP). If you recall, what really caused SVB’s collapse is they had to sell government bonds they held on their balance sheet for a loss of £1.8bn.

How so? Well, in common with most, if not all, mainstream banks they had been buying, for their balance sheet, nice safe and secure government bonds but of course they will have been bought when interest rates, hence bond yields, were on the floor, unlike now when bonds yield 4-5%. Problem comes when, as in the case of SVB, you have to sell these bonds in a hurry. In common with other banks these bonds will have sat on the balance sheet at the price they bought them at, as opposed to what they are worth now, which is known as marking the price of these bonds to market. Pretty obviously, as bond yields go up the price of those bonds fall, which means banks are sitting on large undeclared accounting losses.

The Fed knows this, which is why, a few days ago they invented BTFP. This, what I would call a cunning sleight of hand, now allows the banks to recalibrate their bonds to par value and use that value as security to borrow money from the Fed. The par value, will of course be much higher than current market value because most of the bonds they bought from the government would have a had a par value based on the very low yields, which persisted for many years until the end of last Summer. The Hound described BTFP as the Fed issuing a get out of jail free card to the banks, which this is precisely what it is.

I suggest that the reason why mainstream bank shares in Europe and the UK are having such a torrid time is because, so far, the BoE and the ECB have not installed their own versions of BTFP. Given that many of the banks under their supervision are probably also sitting on large unrealised bond losses, they need to get on and follow the Fed’s innocuous sounding Program pronto.

The author pens the City Grump column.

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