The Variant Perception of the Banking System

Rising interest rates can benefit the banking system, provided they increase gradually. However, a sudden and severe rise in rates can lead to significant challenges for banks. Discrepancies in yields between bank deposits and risk-free short-term instruments like T-bills can trigger unexpected deposit runs, causing margin erosion instead of expansion. This unique perspective led to a bearish outlook on banks like First Republic and Silicon Valley, which experienced rapid deposit outflows due to severe issues related to interest rate risk on their balance sheets.

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