Irrationality can cause these liquidity crises: David Rosenberg
Following widespread concern about the health of the U.S. banking industry, David Rosenberg, the founder and president of Rosenberg Research, said the current liquidity crunch is markedly different from the 2008 financial crisis.
“We're obviously in a financial crisis and it's a liquidity crisis. It's not really one of gaping holes on bank balance sheets,” Rosenberg said in a television interview with BNN Bloomberg Friday.
“It's a different crisis. It's not really about bank capital or bank balance sheets, per se. It's really about liquidity and…a run on deposits.”
Rosenberg said the current problem is a “complete collapse in confidence” regarding the U.S. banking sector which is causing a run on bank deposits. He said the crisis of confidence is irrational, but “irrationality can cause these liquidity crises.”
Weekly data from the U.S. Federal Reserve shows that bank deposits in the U.S. are at negative three per cent year-over-year, Rosenberg said, adding the outflow of deposits is unprecedented.
If deposits in the U.S. banking system continue to contract, Rosenberg said banks could be forced to sell assets, which could spur a credit crunch where banks are less likely to lend.
“The banks will be forced to curtail their lending and that's a big problem in the United States, which is a credit-driven economy. What happens is that you get knock-on effects…where this credit crunch reinforces the recession that was probably already coming our way,” he said.
Amid the current crisis of confidence in the U.S. banking system, Rosenberg said today’s situation is more comparable to 1929 than 2008.
“Remember what happened in 1929. That was triggered by a stock market collapse. We haven't had a collapse but we have had a bear market in equities for the past 16 months,” he said.
The 1929 collapse was caused by an irrational run on deposits that spurred a “fire sale of assets,” according to Rosenberg.
“What we're seeing right now is a lack of confidence in the banking system, especially the regional banks, which is spreading the risk contagion. So when you feel that your deposits aren't safe, you're going to pull them out,” he said.
LACK OF POLICY RESPONSE
The failure of Silicon Valley Bank (SVB) has caused a ripple effect, that U.S. policymakers have failed to address, Rosenberg said.
“This is basically a crisis of large deposits. You do have insured deposits up to a limit. So the question is, do we do blanket unlimited deposit insurance?” he said.
Bank deposits in the U.S. are protected by the Federal Deposit Insurance Corporation (FDIC). Currently, the FDIC insures deposits up to US$250,000 per account ownership category for each depositor at an insured institution.
The FDIC is a “construct of [U.S.] Congress,” Rosenberg said, noting that the last time deposit insurance was raised was in 2008-09.
“I don't know why Congress is sitting on its hands,” Rosenberg said, adding that U.S. President Joe Biden and Congress do not want to be seen providing a bailout to banks.
“I don't quite understand why it's become political. And yes, I think you could have unlimited deposit insurance and [it] just has to be priced and the banks have to be willing to pay for it. It's not a bailout if you have insurance that's ultimately paid by the institutions.”