Banking Angst Returns

Banking Angst Returns

• Investors are again unsettled with the state of banking and that has led to another day of risk-off trading. While the infusion of $30 billion in deposits to First Republic Bank by several money center banks boosted investor confidence, that turned around after-hours and the concerns continue this morning (more on that below). Currently, the 10yr is yielding 3.44%, up 1-03 in price and the 2yr is at 4.04%, up 6/32nds in price.

• The angst around the banking crisis is resuming this morning and that has bond yields lower and equities, particularly the regional banking sector, heading lower as well. Investors are rethinking the $30 billion in deposits placed at First Republic Bank by a handful of money center banks. While it was initially greeted as a show of confidence, when it was revealed later in the day the bank had tapped Federal Reserve borrowings ranging from $20 billion last Friday to $109 billion on Wednesday that had investors questioning the bank’s long-term prospects both from a liquidity and earnings aspect.

• The question investors are struggling with is whether this is truly a systemic issue or just a handful of isolated cases that had unique business models whose risk was perhaps aided by lax supervision. We’ve worked through both the S&L crisis and the 2008 crisis and those certainly smacked of systemic issues. The thrift industry was essentially obliterated in its crisis and the 2008 crisis led to hundreds of banks either being seized by regulators or merged out of existence. Many of us can recall those Friday afternoon emails from regulators announcing the weekly bank closures and whether they involved any of our clients. We certainly hope we don’t return to those days.

• This crisis just doesn’t smell like those previously mentioned. So far, you can point to specific issues with each bank that has been seized, closed, or teetering that contributed to their troubles. We can all point to strong capital positions at most banks, with diverse deposit mixes, and sporting record low credit concerns, but ultimately a bank stands or falls on confidence by its customers. The constant media attention along with some influential voices like Ray Dalio calling SVB a ‘canary in the coalmine” works to undermine that confidence.

• The average bank customer is not equipped to discern the nuances of a bank crisis, so it’s far easier to vote with their feet, especially with uninsured deposits. So far, in contacts with our bank and other clients we’re not seeing much in the way of deposit outflows to date, so customer confidence seems relatively intact. Let’s hope it stays that way and the weekend comes and goes with no additional bank failures.  In the meantime, Chris Nichols has just released an excellent article that gives bankers 10 Not So Apparent Lessons to Learn from this Crisis. You can find the article here.

• As for what the Fed will do next week, it certainly hangs in the balance. Another bank failure spells a pass at next week’s meeting. If we get to Wednesday, however, and a sense of calm is returning to the banking sector then a 25bps hike will still be on the table, especially after the ECB hiked 50bps yesterday.  We tend to think it could come down to fed fund futures. If the market is pricing for a 25bps hike the Fed may just take it. If it’s not priced in then Powell and company may not want to press the matter and take a pass. Right now, fed fund futures see 71% odds of a 25bps rate hike (see graph and table below).

• We do have one bit of economic news later this morning with the preliminary University of Michigan Consumer Sentiment for March. Expectations are that the headline sentiment reading will be unchanged at 67.0, as will the 1yr inflation expectation at 4.1% and the 5-10yr expectation unchanged at 2.9%. That report will probably come and go, however, without too much notice.