Why Isn’t Gold Acting Like a Safe Haven—Yet? The Gold–Oil Ratio and the Liquidity Stress Behind Early-Crisis Gold Weakness (Part II)

 

It is particularly odd that economists who profess to be champions of a free-market economy, should go to such twists and turns to avoid facing the plain fact: that gold, that scarce and valuable market-produced metal, has always been, and will continue to be, by far the best money for human society— Murray Rothbard

In this issue

Why Isn’t Gold Acting Like a Safe Haven—Yet?  The Gold–Oil Ratio and the Liquidity Stress Behind Early-Crisis Gold Weakness (Part II)

I. What the Quiet Actually Means

II. Safe Havens and the Hierarchy of Money

III. The Gold–Oil Ratio and Crisis Transmission

IV. Mean Reversion or Regime Shift? Interpreting the Gold–Oil Ratio

V. Liquidity Stress: When Gold Falls First

VI. Real-Time Example: Central Banks Mobilize Gold, Turkey’s Gold Sales

VII. Real-Time Example: Liquidity Stress in the UAE

VIII. Gold Across Monetary Regimes

IX. Conclusion: The Signal in the Silence 

Why Isn’t Gold Acting Like a Safe Haven—Yet?  The Gold–Oil Ratio and the Liquidity Stress Behind Early-Crisis Gold Weakness (Part II) 

Energy shocks, dollar liquidity stress, and why gold often lags before it leads during financial crises 

Part II 

I. What the Quiet Actually Means 

Part I examined why gold has remained surprisingly subdued despite escalating geopolitical tensions and rising oil prices. The explanation lies not in the failure of gold’s safe-haven role, but in the mechanics of liquidity stress and the structure of the global bullion system. 

Part II explores what that quiet may be signaling. By examining the relationship between gold and oil, the liquidity dynamics of financial crises, and gold’s behavior across monetary regimes, a clearer picture begins to emerge. 

Gold’s silence may not reflect stability. 

It may instead reflect the early stage of a broader liquidity adjustment inside the global dollar system. 

While modern financial systems are built on credit rather than metal, periods of stress often reveal that the hierarchy of money still persists beneath the surface. 

II. Safe Havens and the Hierarchy of Money 

Safe-haven assets are often misunderstood. In practice, they represent savings held in forms with high moneyness—assets expected to preserve value (store of value) while remaining readily marketable during periods of stress. 

Their appeal rests on two characteristics: the ability to preserve purchasing power and the ability to be converted into cash quickly with minimal price disruption or marketability. 

Crucially, these properties are context-dependent. Assets perceived as safe are not inherently risk-free; their status reflects market confidence in their liquidity and convertibility. U.S. Treasuries, for example, are technically government liabilities, yet they function as safe assets because of their deep, liquid markets and the central role of the dollar in global finance. 

Gold occupies a distinct position in this hierarchy. Its moneyness is reinforced not only by the absence of counterparty risk but also by physical characteristics—durability, divisibility, recognizability, and malleability—that historically supported its acceptability across time and geography. 

These features contributed to gold’s persistent marketability, particularly in environments where trust in financial intermediaries weakens. 

However, as Austrian economist Gary North emphasized, these properties do not constitute intrinsic value. Value is not inherent in the metal itself but is imputed by market participants. Gold’s status as a safe-haven asset therefore arises from sustained confidence in its liquidity and acceptability, especially under conditions of stress. 

This hierarchy becomes clearer when markets transition from stability to crisis. 

Figure 1

The divergence among major fiat currencies highlights how gold’s moneyness becomes more pronounced as confidence in fiat purchasing power declines. (chart from Jesse Colombo’s The Bubble Bubble Report) [Figure 1] 

As described by Hyman Minsky, prolonged financial stability encourages leverage and risk-taking. When stress emerges, this dynamic reverses abruptly. Market participants experience a liquidity squeeze, reprioritizing assets according to their moneyness—favoring those that can be converted into cash quickly and reliably without significant loss of value. 

III. The Gold–Oil Ratio and Crisis Transmission 

One way to understand gold’s muted response to current geopolitical tensions is through its relationship with oil. 

Oil represents an immediate claim on global liquidity. It is consumed, dollar-priced "Petrodollar", and highly sensitive to geopolitical disruption. Gold, by contrast, represents stored value—held primarily as protection against monetary instability. 

(Incidentally, oil is often called “black gold,” reflecting its quasi-monetary properties: global acceptability, scarcity, and embedded value as the economy’s primary energy input.)  

Figure 2

In real terms, Brent oil’s price trend appears to have formed a secular bottom in the late 1990s around the Asian Financial Crisis. (Figure 2, upper chart) 

Since then, the broader trajectory has been upward, interrupted by the 2000s commodity spike and the pandemic collapse. This pattern points to deeper structural forces: monetary expansion, chronic underinvestment in energy, and rising geopolitical risk. 

With Middle East tensions intensifying and war-economy dynamics increasingly shaping policy, the current oil shock may prove more persistent than markets expect. 

When geopolitical shocks drive oil prices sharply higher, the global financial system experiences a liquidity drain as energy-importing economies scramble for additional dollars to fund higher fuel costs—tightening financial conditions across currencies and credit markets. 

With dollar credit estimated at roughly $14 trillion—over half in debt securities (Bank of International Settlement)—this dynamic amplifies dollar demand during periods of stress. [Figure 2, lower image] 

This mechanism echoes economist Irving Fisher’s debt-deflation dynamics: rising costs and tightening collateral conditions force economic actors into a dollar funding pressure. 

In such episodes, gold does not always rise immediately. 

Instead, the gold–oil ratio compresses as oil outpaces gold. The system prioritizes settlement over preservation—dollars are needed to pay for energy before reserves can be accumulated as protection. 

Historically, this reflects the early phase of crisis transmission. Energy shocks propagate rapidly through trade balances, currencies, and funding markets, triggering collateral demand that can temporarily suppress traditional hedges. 

Only later—once liquidity pressures ease or policy responses take hold—does gold tend to reassert itself. 

IV. Mean Reversion or Regime Shift? Interpreting the Gold–Oil Ratio 

The gold–oil ratio captures the relative performance of the two commodities; recently, gold has significantly outperformed oil. Heuristically, it can be read as follows:

• High ratio: monetary stress, weak growth, disinflationary pressures
• Falling ratio (oil catching up): cyclical inflation, supply shocks, rearmament, and stronger industrial demand

If the global economy is transitioning toward a war footing—characterized by higher defense spending, rising commodity intensity, and tightening energy geopolitics—then near-term oil outperformance relative to gold is plausible. 

Even in a less oil-dependent world, geopolitical tensions can amplify supply–demand imbalances. 

That said, these forces can overlap. Inflationary pressures, financial stress, and supply shocks may coexist rather than unfold sequentially. 

Mean reversion suggests scope for oil to outperform gold, with historical anchors around ~18–22 (mean) and ~15–18 (median). However, these benchmarks may no longer be stable.

First, Goodhart’s Law applies: once the ratio becomes a widely targeted signal, its reliability deteriorates.

Second, base effects distort comparisons, especially after extreme moves. When ratios are measured off extreme starting points—such as the pandemic collapse in oil or gold’s surge during periods of monetary stress—subsequent moves can appear disproportionately large or directional. In reality, these shifts may reflect mechanical normalization from distorted bases, rather than a clean cyclical signal.

Figure 3

Third, the apparent gold-oil ratio uptrend since 2008 indicates shifting structural drivers—implying that historical mean/median benchmarks may themselves be drifting higher. (Figure 3) 

In short, while mean reversion remains a useful guide, the regime may be evolving—making static historical anchors increasingly unreliable. 

It may be that the recent compression in the gold–oil ratio reflects gold’s prior fat-tailed outperformance, with the current move representing a normalization back toward its two-decade trend channel rather than a structural reversal. 

V. Liquidity Stress: When Gold Falls First 

One of the most counterintuitive features of financial crises is that gold can weaken precisely when investors expect it to strengthen. 

This occurs because gold is not only a store of value—it is also one of the most liquid assets in global markets. 

When financial stress intensifies, institutions face margin calls, collateral demands, and funding obligations. To meet these pressures, they liquidate assets that can be sold quickly.

Gold often becomes one of those assets.

This reflects the liquidity phase described by Hyman Minsky, in which the immediate need for funding temporarily overrides longer-term investment considerations.

During this stage of a crisis, the system prioritizes cash over protection.

Gold may weaken not because its safe-haven role has disappeared, but because it remains one of the few assets capable of generating immediate liquidity.

VI. Real-Time Example: Central Banks Mobilize Gold, Turkey’s Gold Sales 

Figure 4

Recent news reports indicates that Turkey deployed gold-linked lira and foreign-exchange swaps, alongside outright sales, to support the lira during a period of market stress, as the USD/TRY exchange rate surged to successive record highs. Its gold reserves fell by roughly 50 tonnes (to 772 tonnes), the largest decline since 2018. [Figure 4] 

Such operations illustrate another dimension of gold’s role in modern reserve management. By mobilizing gold through swaps, central banks can generate immediate foreign-currency liquidity, effectively using gold as a liquidity bridge—complementing direct FX intervention rather than fully substituting for it. 

However, these tools primarily address short-term liquidity pressures rather than underlying macroeconomic imbalances. 

When markets perceive that a central bank is actively deploying finite reserve assets, these actions can signal constraint—potentially raising risk premia and intensifying pressure on the currency. 

As external buffers are drawn down, the policy path often becomes increasingly dependent on domestic liquidity provision, with central banks resorting to expansion of the monetary base to sustain market functioning. 

This dynamic highlights the reflexive nature of intervention: measures intended to stabilize markets can amplify fragilities over time through resource misallocation.

Importantly, such actions do not diminish gold’s monetary role. On the contrary, they demonstrate that gold continues to function as high-quality collateral within the global financial system during periods of stress. 

VII. Real-Time Example: Liquidity Stress in the UAE 

Recent developments in the Gulf financial system offer a contemporary illustration of these dynamics.

Figure 5

Following a sharp collapse in banking liquidity—reportedly approaching 45 percent in parts of the regional funding market—the Central Bank of the United Arab Emirates moved to inject massive amounts of liquidity into domestic banks. [Figure 5, upper diagram] 

The intervention aimed to stabilize funding conditions and prevent disruptions in the region’s financial system. 

While such measures can temporarily ease liquidity pressures, they also reveal the underlying structure of modern crises. When funding conditions tighten, policymakers must often intervene rapidly to maintain the functioning of credit markets. In the short term, these interventions can strengthen demand for dollar liquidity, particularly in economies closely tied to global energy markets. 

The result is a paradox. 

Even as geopolitical tensions rise and energy prices surge—conditions that would normally support gold—financial systems may initially prioritize liquidity stabilization over reserve accumulation. 

Gold’s subdued behavior during such episodes may therefore reflect not complacency, but temporary pressure within the global funding system. 

This dynamic is further illustrated by recent developments in the U.S. dollar. Despite shocks including the U.S.–Israel–Iran conflict, the DXY index has shown muted gains and even diverges from 2-year rate differentials. [Figure 5, lower pane] 

This suggests that dollar strength in this period is less about a classic safe-haven bid and more about liquidity demand driven by de-risking and deleveraging. 

The lack of coordinated upside in gold, bonds, and bitcoin points to collateral stress rather than a simple flight to safety. Meanwhile, interest rates themselves may reflect not only policy and war risk, but also fiscal pressures and issuance dynamics, blurring the signals that rate differentials typically provide. 

In classic safe-haven episodes, defensive assets tend to rise together. When that coordination breaks down, it often signals that markets are prioritizing liquidity and collateral access rather than portfolio hedging. 

VIII. Gold Across Monetary Regimes

Figure 6 

Gold’s long-term behavior is non-linear. Its bull markets tend to move in waves associated with epochal shifts in global monetary regimes. [Figure 6] 

The first bull cycle followed the collapse of the Bretton Woods system after the Nixon Shock and lasted until the early 1980s. This was followed by a bear market and a two-decade lull, reflecting the “salad days” of the U.S. dollar standard—characterized by the rise of globalization, the Fed’s drift toward easy-money policies, and the deepening of the dollar’s exorbitant privilege. 

A second wave emerged in the early 2000s and accelerated after the Global Financial Crisis, when central banks dramatically expanded their balance sheets in response to economic shocks. 

The current period represents a third phase—marked by a drift toward a war economy: protectionism, sanctions, and kinetic conflict—while also shaped by overlapping forces including evolving monetary policies, the weaponization of the dollar, oil and commodity dynamics, AI-driven structural uncertainty, and central bank accumulation of gold. 

These forces are gradually reshaping how gold is accumulated, traded, and—for central banks—deployed within national reserve strategies. 

IX. Conclusion: The Signal in the Silence 

Gold’s current calm should not be mistaken for irrelevance. 

Financial crises rarely begin with a clean flight to safety. Instead, they begin with liquidity stress. Funding markets tighten, institutions scramble for cash, and the most liquid assets are often sold first to meet obligations. 

In these early stages, the global financial system prioritizes settlement over preservation. Energy shocks drain dollars from the system, trade balances shift abruptly, and capital flows reprice risk across currencies and credit markets. 

This sequence helps explain why gold can appear subdued even as geopolitical tensions escalate. Oil shocks transmit stress through the real economy first, tightening liquidity before investors turn toward long-term stores of value. 

Only later—once liquidity pressures ease or policy responses expand—does gold typically reassert its defensive role. 

The current compression in the gold–oil ratio may therefore reflect not the failure of gold as a safe haven, but the timing of crisis transmission within a dollar-centric financial system. 

If the emerging environment is indeed shifting toward a more fragmented geopolitical order—characterized by energy insecurity, fiscal expansion, de-globalization, kinetic conflicts, and a gradual erosion of monetary trust—then gold’s quiet phase may represent the prelude rather than the conclusion of its cycle. 

The signal is not absent. 

It may simply be arriving later in the crisis sequence. 

US Banking Crisis: Will Philippine Banks be Immune from a Contagion?

 

We have only to establish the fact that the return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the illusory prosperity created by the easy money. People become aware of the faults committed and, no longer blinded by the phantom of cheap credit, begin to readjust their activities to the real state of the supply of material factors of production. It is this—certainly painful, but unavoidable—readjustment that constitutes the depression—Ludwig von Mises 

 

In this issue 

 

US Banking Crisis: Will Philippine Banks be Immune from a Contagion? 

I. US Banking Crisis: The Silicon Valley Bank Run Pulled the Rug Under the Prescribed Banking Benchmarks! 

II. US Banking Crisis: The Bailout and its Immediate Impact; the Periphery to the Core Process 

III. US Banking Crisis: Will the Philippines be Immune from a Contagion? 

IV. The Corrosion of Bank Liquidity and Slowing Pace of Deposit Growth 

V. Three Reasons Behind the Faltering Bank Cash Reserves 

VI. Concentration Risk: Real Estate as the Biggest Bank Borrowers, as Universal Commercial Banks Takes Command of the Financial System 

VII. Summary  

 

US Banking Crisis: Will Philippine Banks be Immune from a Contagion? 

The bank run of Silicon Valley Bank demonstrated the fragilities of modern banking.  Though defending Philippine banks are intuitive, Philippine authorities are "fighting the last war."

I. US Banking Crisis: The Silicon Valley Bank Run Pulled the Rug Under the Prescribed Banking Benchmarks! 

 

GMA News, March 15, 203: Finance Secretary Benjamin Diokno on Wednesday said the Philippine economy is spared from the potential impact of the collapse of Silicon Valley Bank (SVB) in the United States. “[The] Philippine economy [is] unaffected by SVB collapse,” Diokno said in a Viber group message to reporters. 

 

Allow me to open with a quote from the dean of the Austrian school of economics, the great Murray Rothbard. 

 

But in what sense is a bank “sound” when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role? 

 

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. (Rothbard, 2016)  

 

In gist: Borrowing short and lending long leads to liquidity concerns that render the modern banking system vulnerable to bank runs.  

  

This dynamic demonstrates that liquidity, backed by confidence/trust, is the raison d'etre incumbent in the banking system.  Conversely, a dearth of confidence/trust may spur problematic liquidity dimensions that could fuel bank runs.  

 

Liquidity issues are usually products of solvency conditions but not necessarily. 

 

That said, it is natural for authorities to publicly downplay risks, given the sensitivity of the banking system to changes in liquidity and confidence/trust.  

 

And not only do the central banks act as lenders of last resort, but their other technical role is to provide liquidity insurance to banks and, thus, the economy. (Tucker, 2014) 

 

If there has been anything new, social media has played a crucial role in recent bank runs.  

  

Unlike in the past, when people lined up outside the banks for withdrawals, the run in Silicon Valley Bank (SVB) had partly been triggered by network effects (some big tech names asked their connections to withdraw from SVB) and Twitter—the bank run took place in less than 48 hours! 

 

But there seems hardly a realization that three US banks collapsed within six days of March 2023! Six days. 

 

Silvergate Bank announced its voluntary liquidation on March 8th.  Authorities closed Silicon Valley Bank (SVB) and Signature Bank on March 10th and 12th, respectively.  SVB was the 16th largest bank in the US.  

 

But the most important fact was that SVB came as a surprise to authorities and mainstream institutions alike. 

 

Figure 1 

 

The mainstream's banking dashboard didn't exhibit any alarm bells: as the bank run occurred, credit rating agencies even rated SVB as investment grade!  (Since its shutdown, the company erased the ratings.) (Figure 1, uppermost table) 

 

Moody's threatened to downgrade SVB on March 8th.   It lowered its rating to "negative" on March 10th, as the bank folded!   

 

The Visual capitalist has a nifty chart exhibiting the timeline of the SVB collapse, accessible here. 

 

Nevertheless, citing the swift downgrade of First Republic as signifying a panicked reaction of credit rating agencies, analyst Wolf Richter wrote: (bold added) 

 

This comes after the fiasco of SVB Financial, which was rated comfortably inside investment grade by S&P Global and Moody’s until March 10, the day it collapsed, when Moody’s slashed its ratings by 13 notches in one fell-swoop to default, and S&P slashed its ratings by 10 notches to default. (Richter, 2023) 

 

That SVB had banking metrics above required, the analysts of the Cato Institute likewise observed: (bold added) 

 

The 2022 financials show similar ratios for SVB Financial Group, with a slightly higher leverage ratio of 8.11 percent and a slightly lower tier 1 capital ratio of 15.4 percent. (Silicon Valley Bank also reported similar ratios, both higher than in 2021, and both well above the minimum required.) …  So, SVB Financial Group (and the commercial bank itself) had capital ratios approaching twice the minimum required, even after if crossed the $100 billion threshold. (Michel and Anthony, 2023) 

 

The thing is, everyone was flying blind because SVB followed the prescribed banking benchmarks!   

 

Chief Economist of Tressis, Daniel Lacalle pointedly wrote: (bold added) 

 

SVB made one big mistake: Follow exactly the incentives created by loose monetary policy and regulation. 

… 

The entire asset base of SVB was one single bet: Low rates and quantitative easing for longer. 

… 

SVB showed how quickly the capital of a bank can dissolve in front of our eyes. (Lacalle, 2023) 

 

Despite investments in "low-risk" or "high-quality" credit (US Treasuries and Federal Agency MBS), which were substantially tacked into held to maturity (not mark-to-market), soaring interest rates led to unrealized losses in the face of large and volatile uninsured deposits.   

 

Concerned about the mounting losses, SBV's large depositors, mostly tech investors, pulled out.  Social media fueled a domino effect, which further vacuumed liquidity and left SBV near insolvency and unable to settle other obligations.   

 

From a technical perspective, author Satyajit Das explained: (bold added) 

 

SVB's collapse can be attributed to familiar and avoidable banking risks -- asset-liability mismatches and concentration risk. 

 

All financial intermediation involves maturity transformation. Banks take short-term deposits but invest these funds in longer-term loans or securities. This makes them vulnerable to a rapid loss of deposits which exposes them to the liquidity and price risk of realising assets. Abnormal concentration of depositors or borrowers creates exposure to the withdrawal of funding or default on assets or investments with resulting liquidity or solvency issues. (Das, 2023) 

 

In short, the establishment also glossed over the lethal cocktail mix of concentration risk and Balance Sheet mismatch. 

 

Before the banking crisis surfaced, in a speech last February, Martin Gruenberg, the FDIC Chairman presciently warned of unrealized losses in the banking system, (bold added) (Figure 1, middle chart) 

 

This chart shows the elevated level of unrealized losses on investment securities due to high market interest rates. Unrealized losses on available–for–sale and held–to–maturity securities totaled $620 billion in the fourth quarter, down $69.5 billion from the prior quarter, due in part to lower mortgage rates. The combination of a high level of longer–term asset maturities and a moderate decline in total deposits underscores the risk that these unrealized losses could become actual losses should banks need to sell securities to meet liquidity needs. (Gruenberg, 2023) 

 

Long story short, the composition of deposits (funding) and asset mix (operations) matter. 

 

Aside from ballooning balance sheet mismatches, reduced bank competition in the face of skyrocketing assets from Fed policies has magnified concentration risks in the US banking industry. (Figure 1, lowest chart) 

 

II. US Banking Crisis: The Bailout and its Immediate Impact; the Periphery to the Core Process 

 

Nonetheless, the US Fed bailed out the banking industry and its depositors. It created the Bank Term Funding Program (BTFP), an emergency lending program providing loans of up to one year to financial institutions that pledged high-quality collateral—valued at par instead of mark-to-market—allowing them to borrow unimpaired by the losses from rate hikes.   

 

Essentially, it broke its rule of providing a guaranteed limit of USD 250,000 per depositor.  Instead, it signaled a 'blanket guarantee' for uninsured deposits of the industry, which are mainly accounts of the wealthy. US banks have above $9.2 trillion in uninsured deposits. 

 

And with the Fed absorbing devalued collateral, this interest rate subsidy effectively transfers risk from bondholders to the taxpayers. It also signaled that the FED could backstop the losses of the banking system.   

 

Worst, the rescue promotes a moral hazard, which could magnify the industry's risking taking activities since they expect authorities to safeguard their interests at the expense of the public. It should also intensify imbalances in the financial system and the economy magnifying their fragilities. 

 

Figure 2  

 

As it happened, the massive rescue reversed the decline of the Fed’s balance sheet, which soared by nearly USD 300 billion, while the Fed's discount window rocketed to All-time highs as banks availed of the Fed's support! (Figure 2, topmost and second to the highest window) 

 

Panic was in the air.  

 

Fleeing regional banks, depositors shifted into "too big to fail" banks, which were "implicitly" backstopped by the government.  Also, about USD 120 billion of deposits stampeded into government-supported Money Market Funds in a week, resulting in the amassment of about USD 5 trillion of highly liquid/cash-like vehicles. (Figure 2, second to the lowest window) 

 

The mounting differentials of lower deposit rates of small banks (perhaps due to excess reserves and competition) and higher money market fund rates may have prompted the search for higher yields.  This deposit flight escalated to a point where it impaired the liquidity conditions of affected smaller banks.  (Figure 2, lowest chart) 

 

Lastly, as part of the feedback loop, panic at regional banks has also sent depositors scampering towards "implicitly" government-backed institutions or financial vehicles. 

 

Yet, JP Morgan estimates that the Fed may inject liquidity by as much as USD 2 trillion into the system! 

 

In any case, it is path dependent or mechanical for central banks to respond to episodes of financial instability by bailing out or throwing money into the system. It did so during the UK LDI pension crisis, and again, in response to the March 2023 US banking crisis and likewise in last week’s turmoil in Credit Suisse.   

 

In addition, eleven of the biggest US banks joined hands to rescue another troubled small bank, the First Republic Bank, by providing USD 30 billion. Naturally, this had implicit blessings from the Fed. 

 

All this is very interesting.    

 

Monetary authorities did not see this coming, yet they gamble on policies that result in the entrenchment of imbalances, which should lead to such cataclysmic outcomes. Diminishing returns also affect these policies. 

 

Nonetheless, since 2020, we seem to be witnessing a developing financial crisis in motion, via the periphery to the core process: first, emerging/frontier market sovereign debt crisis (Zambia, Ghana, and Sri Lanka), then to UK’s pension crisis, then March 2023 US banking crisis and then Credit Suisse saga.  

  

And the time window for the credit events to emerge appears to be narrowing. 

 

In the end, if the crisis emerged by slipping past the radar of the US authorities and financial institutions, why should the public believe the assurances of the authorities? 

 

In 2017, when the current Treasury secretary Ms. Janet Yellen was the US Federal Reserve Chair, she predicted that there would be "no crisis in our lifetimes." 

 

And this applies to the local environment too. 

 

III. US Banking Crisis: Will the Philippines be Immune from a Contagion? 

 

Should developments in the US serve as a roadmap elsewhere, including the Philippines? 

 

Again FDIC’s Mr. Gruenberg, from a speech two days before the voluntary liquidation of Silvergate Bank and four days prior to the shutdown of SVB, (bold added) 

 

The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at yearend 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry. (Gruenberg, 2023) 

 

Remember, because SVB's financial metrics seemed healthy in the banking system's dashboard, it failed to spot the abrupt emergence of the crisis.   

 

And so, using the above template, we shall focus on the liquidity, assets, and concentration risks of the domestic banking system.

 

This article aims to provide updates on the health of the banking system.   

 

And it is up to the reader to discern the validity of the assurances made by the authorities. 

 

How significant are the balance sheet mismatches of the banking system? Well, a lot.   

 

The BSP admitted to this in 2019 in their 2018 Financial Stability Report, which incidentally operated on an environment of falling CPI and interest rates.   (bold original, italics mine) 

The build up of leverage creates mismatch risks in the banking books. While financial authorities look at the CGDP ratio and the CGDP gap to get a holistic view of the standing of credit vis-à-vis the economy, banks get a similar—though own-view—perspective from its loan-to-deposit ratio (LDR). As expected, this has trended upwards (Figures 2.11) near to levels that would theoretically represent the upper bound as a result of the reserve requirement.  

 

The rising LDR suggests that the maturity mismatch is likewise increasing. Funds sourced by banks are largely savings deposits which are then used to fund longer-term credits. As Figure 2.12 shows, this creates a gap between the amount of assets and the corresponding amount of deposits categorized by maturity. With the average maturity of loans calculated at 4.25 years (Figure 2.13), the maturity gap then translates into a liquidity gap as well. Banks would, therefore, not only provide for the difference between the tenor of what they lent versus the short-term deposits that they borrowed but they will also have to provide liquidity for the periodic withdrawals of those deposits. (FSCC, 2019) 

And much has happened between then and now.   

 

And this perspective provides a clue why the BSP embarked on a series of cuts in the Reserve Requirement Ratios (RRR) of Banks in 2018-2019 from 19% to 14%. 

 

IV. The Corrosion of Bank Liquidity and Slowing Pace of Deposit Growth 

 

How liquid is the banking and financial system? 

 

 

Figure 3 

 

The two principal liquidity gauges of the BSP, cash-to-deposit and liquid assets-to-deposit, have been headed downhill since 2013.  (Figure 3, upmost chart) 

 

Cash-to-deposit last January was at its lowest level since at least 2013. 

 

After its May 2021 pinnacle, liquid assets-to-deposit seem to have turned the corner and resumed its southbound path. 

 

Despite the recent injections by the BSP, cash reserves have been dropping.   Cash reserves have been in deflation since December 2021. (Figure 3 middle chart) 

 

And much of the cash levels of banks have resonated with BSP QE operations (net claims on central government), which demonstrates the critical role dispensed by the BSP. (Figure 3, lowest pane) 

 

Figure 4 

 

And despite the recent upsurge in bank lending, the growth of deposit liabilities continues to slow.   The total deposit liabilities grew 7.7% last January, primarily from FX deposits (which could have emanated from FX borrowings of the Bureau of Treasury, while some may have signified conversions from peso accounts).    (Figure 4, topmost chart) 

 

And depositors have barely been lured by rising rates.  (Figure 4, middle pane) 

 

Peso deposits grew by 6.53% in January, powered mainly by Time Deposits, which grew by 30.4%.  Time deposits accounted for 21% of the Peso deposits.    

 

Curiously, savings deposits have barely been growing.   Following the spike from the BSP injections last December, it was up by a measly .1% this January.  Peso savings even suffered two months of deflation in October and November.  

 

The thing is, though deposits continue to grow, it has been substantially slowing.  

 

And neither cash reserves (which depend on the BSP activities) nor deposit liabilities have exhibited strength.  

 

V. Three Reasons Behind the Faltering Bank Cash Reserves 

 

And why have the stock and the delta or rate of change of cash reserves been declining? 

 

The first factor is credit delinquency.   

 

Non-Performing Loans (NPL) gnaw at cash or vacuum away liquidity.    

 

Thanks to the various relief measures, which helped the banking industry look better statistically, NPLs have improved despite rising rates.  However, NPLs rebounded last January.    

 

Interestingly, loan provisions have diverged from NPLs since the 2H of 2021, possibly indicating repercussions from such relief measures. The BSP decreed an extension of such measures until June 2023. (Figure 4, lowest window) 

 

The next factor is the tightening policy of the BSP.  

 

Such activities cover not only rate hikes but also financing operations of deficit spending activities of the National Government.   

 

After the monster December deficit funded by the release of government deposits in the same month, the BSP reversed much of its operations this January as fiscal activities turned into a surplus from a sharp decline in public spending. (Prudent Investor, 2023) 

 

The "Held-to-Maturity" segment of financial assets of the banking system represents the last factor.  

 

The following excerpt comes from the BSP-led FSCC's 2017 Financial Stability Report.  

 

Banks face marked-to-market (MtM) losses from rising interest rates. Higher market rates affect trading since existing holders of tradable securities are taking MtM losses as a result. While some banks have resorted to reclassifying their available-for-sale (AFS) securities into held-to-maturity (HTM), some PHP845.8 billion in AFS (as of end-March 2018) are still subject to MtMlosses (Figure 3.8). Furthermore, the shift to HTM would take away market liquidity since these securities could no longer be traded prior to their maturity (FSCC, 2018) 

 

It has been crystal clear that the rising rates have substantially affected bank holdings of Philippine Treasuries.    

Figure 5 

 

First, banks have also been part of liquidity operations in collaboration with the BSP.    

 

Hence, a critical factor in the bank accumulation of Treasury securities has been the surge of net claims on the central government (NCoG).  (Figure 5, topmost chart) 

 

Rising rates appear to have backfired on bank holdings of these "safe" assets.  

 

Yet, in the context of the peso, the NCoG of banks has been slightly off the record highs, while HTMs carved a new high last January.  

 

Because banks have sustained their accumulation of treasuries, the financial assets continue to outgrow the loan portfolio.   

 

Next, since financial assets represent 96% of the total investments, its winning streak has eroded the share of cash and the total loan portfolio.   (Figure 5, second to the highest pane) 

 

As of January 2023, the investment pie rose to a 29.2% share of the total assets of the banking industry, up from 21.42% in June 2020 or signifying a 36.3% growth.   

 

The latest 'recovery' in banking loans has arrested its declining share.  

 

The bank lending pie remains a slight majority—52.3% in January—of the overall bank assets.  

And because bank investments recently reached record highs, rising rates affected mark-to-market (non-HTM) securities, which led to record losses last October. (Figure 5, second to the lowest window) 

 

And thanks to the falling yields and partly due to BSP operations, such losses have been pared down to Php 86.1 billion in January 2023 from Php 122.85 billion last December and Php 146.06 billion last October.  

 

Finally, as noted by the BSP, the drain in liquidity, as measured by cash-to-deposit, appears to mirror the incredible surge in HTMs. (Figure 5, lowest chart) 

 

HTMs have become a substantial segment of bank balance sheets.   

 

As of January, it accounts for 17.4% of total assets and 22.7% of deposit liabilities. 

VI. Concentration Risk: Real Estate as the Biggest Bank Borrowers, as Universal Commercial Banks Takes Command of the Financial System 

 

Let us move on to concentration risk. 

 

Despite the sharp drop in the % share of real estate loans, the sector remains the biggest borrower.  (Figure 6, topmost chart) 

 

 

Figure 6 

 

As of January 2023, the sector's share of total bank loans accounted for 19.6% as consumer loans outsprinted bank lending growth.   

 

Yet, total bank loans slipped to Php 2.25 trillion in January 2023 from the landmark high of Php 2.3 trillion last December.  

 

The real estate sector remains the largest borrower despite its declining contribution to the GDP. (Figure 6, second to the highest chart) 

 

Further, although the pie of Universal and commercial bank of the total financial resources dipped to 77.5% in January from the milestone of 77.8% last December, it remains the principal driving force of the financial resources. (Figure 6, second to the lowest chart) 

 

Meanwhile, due to Universal and commercial banks, the banking industry has shanghaied an 82.52% share of the total resources, a tad lower than the historic 82.9% last December. 

 

Finally, as a % share of total bank assets, total capital accounts bounced by 12.31% last January from 11.74% in December.   

 

Despite the relief measures, which muddies the real health conditions of banks, the Total Capital Accounts share of total assets has been on a cascade since 2019.   It's been on a downtrend since 2013. 

 

A decline of more than 13% of the asset base could be enough to wipe out the capital account. 

 

As noted above, the "SVB showed how quickly the capital of a bank can dissolve in front of our eyes." 

 

VII. Summary 

 

In summary, we find the following facts. 

 

Bank liquidity, dependent on the BSP, continues to erode.   

 

Deposits, the cheapest source of bank financing, continue to grow but at a slower pace. 

 

The forces affecting bank liquidity have been the following:  

 

One, rising NPLs consume liquidity.  

 

Two, to combat inflation, the BSP has implemented liquidity-tightening policies. 

 

And last, a record surge in HTM assets has locked out accessible liquidity to the industry. 

 

Regarding concentration risk, the real estate sector remains the largest client of banks. 

 

Led by UCs, banks continue to shanghai a larger share of financial resources. 

 

The Total Capital Accounts share of total assets has been on a cascade since 2019. 

 

How "sound" is the domestic banking sector given the SVB template? 

 

_____ 

References 

 

Rothbard Murray N. Anatomy of a Bank Run, March 7, 2016, Mises.org  

 

Tucker, Paul, The lender of last resort and modern central banking: principles and reconstruction, Working Papers p.12, 2014 Bank for International Settlements 

 

Richter, Wolf; First Republic Downgraded by S&P from Confidence-Inspiring-LOL “A-” Investment-Grade to BB+, One Itty-Bitty Notch into Junk. Shares, Bonds Re-plunge, Wolfstreet.com, March 15, 2023 

 

Michel, Norbert and Anthony, Nicholas Dodd Frank Was Never Gutted – It Was Barely Touched, Cato Blog March 14, 2023 

 

Lacalle, Daniel; Silicon Valley Bank Followed Exactly What Regulation Recommended, March 12, 2023 

 

Satjayit Das, The Unwinding: Will collapse of $200-billion Silicon Valley Bank trigger major contagion event? March 13, 2023, New India Express 

 

Gruenberg, MartinRemarks by FDIC Chairman Martin Gruenberg on the Fourth Quarter 2022 Quarterly Banking Profile, February 28, 2023 FDIC.gov 

 

Prudent Investor, The BSP Unveils Stealth QE 2.0 (Variant)! January 15, 2023, Substack, blogger 

 

Gruenberg, Martin: Remarks by FDIC Chairman Martin Gruenberg at the Institute of International Bankers, March 6, 2023 FDIC.gov 

 

FINANCIAL STABILITY COORDINATION COUNCIL 2018 H1–2019 H1 FINANCIAL STABILITY REPORT, p.15-16, September 2019 Bangko Sentral ng Pilipinas  

 

FINANCIAL STABILITY COORDINATION COUNCIL, 2017 FINANCIAL STABILITY REPORT p.24, June 2018, Bangko Sentral ng Pilipinas, Bangko Sentral ng Pilipinas