FIVE MINUTE FINANCE: US BANKS ENTER ‘GREAT CONSOLIDATION’, DE-DOLLARIZATION EXAMINED, FTX VS. CELSIUS
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Let’s see what’s going on this week:
- Powell Tries to Calm Fears as Banks Consolidate
- FTX Debtors vs. Genesis Debtors in FTX Restart Battle
- What Does Bitcoin Derivatives Sentiment Say?
- CEX Trade Volume Hits First Downturn in Three Months
- Why the Notion of a ‘De-Dollarization’ is Overhyped
US Banking System Undergoes ‘Great Consolidation’
- PacWest Bank Collapses 53% After Reports of Possible Sale Emerge (source)
Will More Banks Pop Off at the End of the Fed’s Hiking Cycle?
We are witnessing monetary history in the making — but not exactly in a good way.
With the FDIC seizing yet another bank, this time First Republic as the 14th largest bank in the US, the historic gap between the number of failed banks vs. the size of their assets is enormous.
Just three failed banks (excluding Silvergate) in the last two months had more assets than the combined failure of banks following the Great Financial Crisis of 2008.
Between 2001–2023, there were 564 bank failures. The last three completely overshadowed the size of previous collapses. Image credit: FDIC.
As a result, we’re now seeing a serious consolidation among ‘systemically important banks’ (SBIs). Namely, having acquired FRC, JPMorgan Chase is now the largest depository institution in the US.
In fact, JPMorgan now holds 16.7% of all US deposits, valued at $17.1 trillion.
Unsurprisingly, this marks the acceleration phase of the already rolling Great Consolidation of the US banking sector.
Image courtesy of Statista.
On Wednesday, at a regularly scheduled press conference, Fed Chair Jerome Powell assured the public that “the U.S banking system is sound and resilient”.
Yet, just a few days later, Powell’s words rang hollow. PacWest Bank is the next candidate seemingly following in FRC’s footsteps. Over the week, PACW shares fell by -67%, down -86% year-to-date.
The abrupt downturn follows a report on the bank seeking “strategic options”, including a sale.
What exactly is the problem with all these banks?
It all flows back to the Federal Reserve. As the federal funds rate is now above 5%, it means money markets outcompete deposit rates:
- Money markets, composed of banks and corporations, engage in short-term borrowing and lending between each other.
- One of these short-term transactions takes the form of reverse repurchase agreements.
- With reverse repurchase agreements, or reverse repo, the Fed manages the money supply via short-term borrowing to banks.
Therefore, the interest rate set by the Fed is drastically higher than deposits. As of May, the average interest rate on US savings accounts is merely 0.23%. Moreover, because this is the Fed, there is no risk involved in losing the principal.
This is in stark contrast to smaller commercial banks that have to rely on limited FDIC insurance.
Lastly, money markets are more liquid than deposits, which makes them even more attractive.
Altogether, this creates a macro landscape in which smaller banks are less competitive, less able to attract deposits, make loans, and generate revenue. In fact, it’s fair say the environment incentivizes smaller banks to take more risk to compensate.
But this is nothing that surprises anyone in-the-know. The Atlantic Council described the record volume in reverse repos as an “unhealthy development” back in January. Likewise, we know with absolute certainty that Jerome Powell is aware of this dynamic.
After all, it was Powell who wrote this in 2012:
Powell also made it clear when he described it as “unloading”.
The failed banks, and potentially more to come, manifest that unloading.
But, with another 25bps rate hike on Wednesday, we are back to the highest interest rate level since 2006, just prior to the Great Recession.
In his speech this week, Powell omitted the usual talk of “more hikes for longer”.
This itself is significant, prompting the market to expect a rate cut (ease) as early as September.
Federal funds rate probabilities after the latest 25 bps hike. Image credit: CME Group.
Lastly, another raising of the debt ceiling is a given — a certain path to currency debasement if not met with drastic spending reforms. Powell said the Fed’s stance on this issue is neutral, but…
“no one should assume that the Fed can protect the economy from the potential, you know, short- and long-term effects of a failure to pay our bills on time.”
And if the debt ceiling is raised again, the Federal government would have to devote larger funds for interest payments. This is where the Fed could step in with rate cuts to lessen the blow.
Meanwhile, Bitcoin — the digital asset designed as an alternative to central banking — continues to hold strong at just under $30k.
Is a Full FTX Restoration Feasible?
- FTX is Seeking to Reclaim $3.9B In Fiat and Crypto From Genesis (source)
Debtor on Debtor Clash
When FTX went bust in November, the Financial Times estimated that customer deposits amounted to $8.4 billion.
Based on the prices of crypto assets back then, this meant customers might be able to recover 40–50% of their deposits, per analysis from Messari:
Image credit: Messari.
Last month, there was much talk of a complete restart of the exchange, as FTX Andy Dietderich described the situation as:
“The situation has stabilized, and the dumpster fire is out,”
The new restorable balance sheet amounts to $7.3 billion, out of which $2 billion is in cash and $4.3 billion in cryptocurrencies. The value of the latter is in flux depending on market conditions.
But could the final shoring of funds be in play?
On Wednesday, a court filing came out, showing that FTX is exploring the recovery of up to $3.9 billion from Genesis, both in crypto and cash.
Much of the funds, at $1.8 billion, come from loan repayments, alongside $273 million issued as collateral by Alameda Research to Genesis Global Capital.
The rest would come at $1.6 billion from Genesis’ withdrawal just before bankruptcy, alongside $213 million withdrawn by GGC International.
In legalese, FTX debtors are counting on “avoidance claims”.
These legal actions allow bankruptcy trustees to recover certain transfers made by the debtor prior to the bankruptcy filing. Therefore, an avoidance claims stratagem could undo transfers that could’ve given unfair advantage to some creditors over others.
In this case, FTX debtors are counting on the judge to prioritize them over Genesis. Given the amount of claims listed, just a portion approved would go a long way in making FTX customers whole.
How is Bitcoin Doing on the Derivatives Front?
- The State of Crypto Derivatives (source)
Derivatives Sentiment Says: Still Bullish, but Lessened Enthusiasm
Compared to spot-trading, derivative trading is all about speculation and higher risk-taking.
That’s because various derivatives contracts — futures, options, perpetuals — amplify both gains and losses.
With this in mind, how is Bitcoin fairing after several attempts to move beyond $30k? According to Kaiko research, the rally in mid-April was largely driven by speculative long-positions. Since then, Bitcoin open interest has lost steam.
Image courtesy of Kaiko.
When it comes down to Bitcoin options sentiment, calls (betting on price increase) are still prevailing over puts (betting on price decrease).
Therefore, Bitcoin options still generally reveal bullish sentiment.
Image courtesy of Kaiko.
With every new bank failure (except for crypto-focused Silvergate), Bitcoin has responded positively. This is now manifesting in Bitcoin’s implied volatility (IV), as a reflection of the market’s expectation of Bitcoin’s future volatility.
Typically, Ethereum has a higher IV, which recently shifted to Bitcoin.
Image courtesy of Kaiko.
It appears that investors are not only perceiving Bitcoin as a beneficiary of the US banking crisis, but they also perceive other investors to likely do the same.
CEX Trading Volume Deflating
- Coinbase App Downloads Decline ahead of Key Earnings Report (source)
Several Factors Conspire to Lower CEX Flows
Multiple recession signals are popping up all over the place. Even Jerome Powell revealed to fake Zelensky that recession is in the cards as the best bet to beat inflation into coma.
By the same token, rapid currency debasement is no longer a focus for investing in hedges like Bitcoin. At least, for the time being.
In times like these, it is then expected to prioritize safer assets than risk-on assets like cryptocurrencies. And whether some like it or not, hard cash is still prioritized during recession, alongside specific types of stocks.
Combined with the collapse of two crypto-facing banks, Silvergate and Signature, we’re seeing a notable drop in centralized exchange trading volume.
This is the first downturn following three consecutive months of gains so far this year.
Image courtesy of Kaiko.
The world’s largest exchange, Binance, is also a major contributor to the downturn, having ended its zero-fee trading promotion on March 22.
Coinbase joined the trend as well. While there is some slight uptick in trading volume, Coinbase app downloads have hit a new low.
Image credit: Apptopia
However, not all is bad news for Coinbase. After cutting costs with layoffs, its Q1 earnings report shows better revenue than expected, at $773 million. COIN stock surged accordingly yesterday, by +8%.
Overall, the crypto market is still at a higher level than prior to the 2020 Fed-induced bullrun.
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Is a De-Dollarization Likely?
- Could a BRICS Currency Threaten the US Dollar’s Global Reserve Status? (source)
Dollars: Blood Cells of Global Finance
The way Russia was sanctioned opened many doors previously thought closely guarded.
The United States has been that mighty guardian, following the Bretton Woods agreement in 1944. In exchange for depegging from the gold standard, 44 allied countries pegged their currencies to the US dollar, which itself was backed by gold reserves.
Serving as a proxy for sound money, the dollar became the global reserve currency (GRC). The International Monetary Fund, as one of Bretton Woods byproducts, has been hard at work to ensure that dominance via loans.
This allowed the dollar to retain its dominance even after the US went off the gold standard in 1971.
After 1971, when President Nixon ended direct dollar-gold convertibility, US gold reserves flatlined. Image credit: CEIC Data.
Today, there is no aspect of global commerce not dominated by dollars. IMF’s data for Q4 2022 shows that the dollar holds 58.36% of the world’s total currency reserves. In contrast, the Chinese yuan holds 2.69%.
Image credit: IMF
From the total $11.96 trillion in foreign exchange reserves, claims in US dollars are at $6.47 trillion as of Q4 2022. This dominance is reflected in international finance as well:
Image credit: Bank for International Settlements (BIS) as of December 2022.
With that said, is the dollar-GRC trajectory on the downslope?
Very long-term, possibly. Short-to-long term, no.
The problem is, disentangling the dollar as GRC would be akin to removing blood vessels from the body. This is why IMF director, Kristalina Georgieva, was so confident on Monday:
“And there I don’t see an alternative, I don’t see it coming any time soon”
The main GRC usurpers come from the BRICS nations — Brazil, Russia, India, China, and South Africa.
After Russian assets were seized in hundreds of billions, and some Russian banks were kicked off the SWIFT payment system, they now see the dollar as weaponized.
Even more countries applied to expand BRICS, to 24 total. Combined, their countries would make 47% of the world’s population. More importantly, just five nations — Russia, China, Saudi Arabia, United Arab Emirates and Iran — account for 36% of the world’s oil production.
But is that enough?
Not really.
You see, the main manufacturing powerhouse, China, has its economy effectively pegged to the dollar. We can see this from China being the second-largest foreign holder of US debt, at $859 billion.
Image credit: USAFacts.org
We can also see it from massive China-US imports and exports activity, having increased to $690.6 billion last year.
More tellingly, even when a country goes off into Chinese yuan territory, there is not much to worry about. Case in point, Argentina has triple-digit inflation and a dollar reserve shortage, which forced its hand to seek yuans.
Likewise, for BRICS to deliver a brand new, commodity-based currency, they would have to be unified in purpose.
Just yesterday, Russia and India ceased talks over using rupees for trade, preferring the Chinese yuan instead, which is pegged to the US dollar. And do we even have to go into frequent border skirmishes between India and China?
At the end of the day, other currencies are more likely to fall before the dollar does. When FedNow comes online, the dollar might even be invigorated.
We can be fairly certain of this, as USD-based stablecoins have already become a safe-haven for inflation-stricken countries like Argentina and Turkey.
A de-dollarization could happen some day, but there’s very little reason for it to happen anytime soon.
Tweets of the Week
Emergency bank loans declined this week — but only AFTER removing the loans to JPMorgan & the FDIC to buy First Republic.
The Fed removed them to downplay the crisis.
Add those back, & emergency loans rose to $321 billion, that’s TRIPLE the peak of emergency loans in 2008 🚨
The end result of the banking crisis will be increased centralization of deposits and quasi-nationalization of “too big to fail” banks
The case for Bitcoin as the decentralized alternative has never been so clear
$JPM making a killing on this $FRC deal. Buying $18bn in net assets-at-market by paying $10.6bn, so a $7.4bn book profit!
Also subsidised financing & loan-loss sharing on top. Restructuring costs to be deducted from this, but…
“Thank you, US government! Ca-shing!” -Jamie Dimon
El Salvador 🇸🇻: adopts #Bitcoin and eliminates all taxes on technology innovations…
USA 🇺🇸: proposes 30% excise tax on Bitcoin mining and has sitting congressmen calling every Bitcoiner a “tax evader” while our banking system crumbles into dust…
Do better, America.
BREAKING: 100% of all regional banks in the United States have their stocks in the red today, for the first time ever.
This comes a day after Federal Reserve Chair Jerome Powell said the US banking system was stronger than ever.
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