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US banks need a lifeline

It’s been almost 6 months since #svb failure in March, and thanks to the rapid intervention of the #fed and the #fhlb, the US banking system has been able to survive with the banking term funding program as a life line. However, the problem with the duration mismatch (credit issues haven’t come up yet) between assets and liabilities is still very much present. Rapid #hikes in rates have made deposits very expensive vs long term bonds bought during #zirp. There are around $1.8Tn in mark to market losses compared to $2.2Tn in capital. If the fed keeps rising rates, they’re going to increase the problem, and the BTFP program ends in March, which indicates that it will have to be extended. The problem can be cured with time, assuming there are no credit events, but banks may need 3-5 years to rinse the low cash flow, high duration portfolio into a lower duration high cash flow one. In the meantime, they will need help and their ability to operate will be compromised.

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