Commentary
Federal Reserve data shows $174.5 billion of deposits left the banking system in the week after the Silicon Valley Bank collapse. Most of the money went to money-market funds, as Bloomberg shows that assets in this class rose by $121 billion in the same period.
The data shows the challenges of the banking system in the middle of a confidence crisis. However, as many analysts point out, this isn’t necessarily the main factor that dictates the risk of a credit crunch.
Deposit flight is certainly an important risk. Many regional banks will have to cut lending to families and businesses as deposits shrink, but in the United States, bank loans are less than 19 percent of corporate credit according to the International Monetary Fund, while in the euro area it’s more than 80 percent. What will generate a credit crunch is the destruction of capital in the asset base of most lenders. The slump in mark-to-market valuations of all asset classes from loans to investments is what will ultimately drive an inevitable credit contraction….