>"We, JPMorgan, are willing to bet $5bn that First Direct does not fail, with no upside to us if they do not" is a rather powerful statement.
It seems to me that there is a considerable amount of risk to the participating banks if FRB fails. "Hold the line" is right - if more banks fail, these participating banks will lose a lot more than their $1B each.
I do wonder if there's something specific to FRB that made them pick this - is it the most likely to go next? Did it have published liquidity issues?
As I understand things, the problem at SVB was that they had customer deposits tied up in multi-year treasury notes which are among the most secure investments going but they couldn't withdraw the money fast enough to keep up with customers' instant-access accounts.
Having your money be secure but inaccessible for several months is obviously a problem if you're a business that needs to make payroll, or a crypto exchange that needs to allow customer withdrawals.
If the bank has plenty of cash but some of it's time-locked, then JPMorgan aren't at risk of losing their entire $5bn - they merely risk having it tied up for a year or two, perhaps getting an uncompetitive interest rate.
It’s also a problem if another bank is offering a higher interest rate. Customers will smartly ask for their deposits back to get interest elsewhere requiring that a bank sells its assets early, which isn’t possible to do so if they are locked into long dated underwater assets.
They would definitely have very carefully checked their books. I expect they wouldn’t do it if the combined amount was not such that it all but guarantees the bank won’t fail.
Obviously these big banks have a strong interest in maintaining confidence in the wider banking sector so want to make sure it doesn’t go under.
> It seems to me that there is a considerable amount of risk to the participating banks if FRB fails. "Hold the line" is right - if more banks fail, these participating banks will lose a lot more than their $1B each.
A 100% haircut would mean that their assets are effectively worthless. I highly doubt that the depositing banks would have done this if that were the case.
Yes, that‘s my point: Even in case of an unprecedented interest rate hike and 10-year treasuries, the haircut due to depreciating asset values would not be 100% but much less.
It seems to me that there is a considerable amount of risk to the participating banks if FRB fails. "Hold the line" is right - if more banks fail, these participating banks will lose a lot more than their $1B each.
I do wonder if there's something specific to FRB that made them pick this - is it the most likely to go next? Did it have published liquidity issues?