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Column – Inequality and 'deposit glut' sow seeds of bank instability: Mike Dolan


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Mike Dolan

LONDON (Reuters) – Rising wealth inequality and the rise of the digital economy are likely to conspire to disrupt the entire banking system – an intriguing link that could help resolve world Some problems in the market.

Many investment strategists have seen the ebb and flow of the world over the years Liquidity is critical to the value of stocks and bonds – largely driven by Central bank policy decisions, including direct injection or reduction by buying and selling assets.

Indeed, many believe that the past few months have been a time when stocks have been extraordinarily frivolous in the face of rising interest rates and recession fears. The reason has to do with this at least in part, as the Fed was forced to expand its balance sheet again to rein in US bank runs in March.

And, since global liquidity matters, the bowl keeps filling as the Bank of Japan continues to buy government bonds at a rapid pace.

But the bigger liquidity picture in all of this is a long-term analysis of former Fed chair Ben Bernanke 25 Known as the “Global Savings Glut” – China and other developing countries have had increasing savings surpluses in the past years and pre-retirement hoarding in aging rich countries.

The main thrust of the thesis is to seek the ‘safe assets’ of global savings to flow into Western markets, driving down government bond yields and lending rates, compressing poor and generally drove up stock prices. (OTC: 800SBNY

) last month and many regional banks The deposit run shows a different angle – an increasingly destabilizing “deposit glut” from within the richest countries. In a paper published by the Center for Economic Policy Research, Guillaume Vuillemey of HEC Paris details the Bank of America’s role in How local exposure to high saving “intangible asset intensive” or digital companies – and related household wealth inequality where the wealthiest tend to hold large cash savings – lead to “unprecedented” ratios of deposits to GDP , Insurance Threshold.

The file shows how the past the ratio of annual deposits to total bank liabilities rose to 11% from10%, raising the overall U.S. deposit-to-GDP ratio to a record level 25% In progress.

but the ratio of uninsured deposits to total bank deposits and equity has almost doubled, surpassing

% Analyzing market contagion over that period and last month suggests that the degree to which other bank stocks respond to stress is clearly correlated with the size of unincorporated deposit exposure.

“In a context of rising wealth inequality and rising corporate savings, more and more bank deposits are uninsured and managed by experienced agents traders hold,” Vuillemey wrote. “This means that these deposits are increasingly vulnerable and the deposit insurance scheme … is slowly losing its effectiveness.”

As Technicolor in SVB’s run shows, uninsured large deposits are more volatile – as any hint of their health of the bank is Very responsive and can be moved with a button. Vuillemey’s paper says expanding public insurance to cover these could be considered, but with significant costs German risk, i.e. why concentrated wealth should be insured at a greater cost anyway.

For many market strategists looking at the overall impact of these events, it’s just throwing everything back into the pool of monitoring global liquidity – and deciding Whether the massive squeeze on government investment money funds has peaked or is just beginning.

Then, you have to choose your model and variables for the blizzard.

Citi strategist Matt King remains convinced that the total net $1 trillion in liquidity injected into the financial system by global central banks so far this year is a major world The reason why stocks, bonds and credit spreads are doing so well.

But he also believes in $50 Billion is about to reverse – due in part to complicated Treasury and Fed accounting over debt ceiling standoff , partly due to less demand for monetary easing in China and partly due to increased liquidity tightening by the European Central Bank.

“Keep watching the liquidity numbers – and buckle up,” Kim told clients last week. However, Michael Howell, global liquidity expert at CrossBorder Capital, is equally convinced of the worst-case scenario as world stocks and bonds were hammered last year The liquidity crunch is over and a new cycle has begun.

CrossBorder believes that central banks have made the decision to separate financial stability from monetary policy and will continue to ensure that the former has sufficient liquidity.



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