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Bank Failures, Recession Ahead


While the market was surprised by the stronger-than-expected U.S. economic data like jobs, the Purchasing Managers’ Index (PMI), and CPI, a run on the Silicon Valley Bank occurred resulted in its collapse. Ironically, some analysts recommended banking stocks based only on the argument of an interest rate increase. The prices of these stocks plunged, it turns out. They seemed naïve to the extent of not knowing how banks make money. Banks borrow short and lend long by construction. Banks are considered losers because of the inverted yield curve, which has been worsening and continues to get longer.
Even though

banks’ profits rely heavily on fee income nowadays, their clients make money by exploiting returns from holding longer-tenor (term) products. Clients would be unable to make a profit on fee income if short-tenor returns are extremely high as they have been in recent times. Given that banks and their clients’ profits align, propriety trading (selling bonds and the like) is probably the only significant revenue source independent of the long-short yield gap. However, this only accounts for a small percentage of total ….revenue.

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