Moody’s Puts First Republic, Five US Banks on Downgrade Watch Concerns are growing for regional banks.
Western Alliance Bancorp., Intrust Financial Corp., UMB Financial Corp., Zions Bancorp. and Comerica Inc. were the other lenders put on review by Moody’s. The credit rating company cited concerns over the lenders’ reliance on uninsured deposit funding and unrealized losses in their asset portfolios. (…)
San Francisco-based First Republic dropped a record 62% on Monday, while Phoenix-based Western Alliance tumbled an unprecedented 47%. Dallas-based Comerica slid 28%.
In the case of First Republic, Moody’s said its share of deposits that exceed the Federal insurance threshold make its funding profile more sensitive to rapid, large withdrawals. (…)
First Republic said earlier that it has enhanced and diversified its financial position through access to additional liquidity from the Federal Reserve and JPMorgan Chase & Co.
- JPMorgan, other big U.S. banks flooded with new clients post SVB collapse-FT Even the U.S. government’s emergency measures to stop the collapse of more banks have not stopped depositors from trying to move their accounts to larger banks or to shift to money market funds, FT reported.
- Bank share sell-off spreads to Japan as SVB collapse shakes markets
- The fallout from the SVB situation is still fluid, and we do not believe that this is a Lehman moment. It may, however, be a Bear Stearns moment. The risks in the market that catalyzed the SVB collapse are still out there. Regulators have given financial market participants a break by backstopping the SVB depositors and creating the BTFP. Investors must remain alert to the disintermediation risks that have been brought on by the Fed’s unrelenting and ongoing quantitative tightening. Complacency is the investor’s enemy. (Guggenheim Partners Investment Management)
Michael Lewitt, The Credit Strategist:
The government reached the best possible solution for the current banking crisis. Taxpayers – at least not directly – will not be bailing out these banks. Instead, a special fund paid for by other banks will pay the freight. Of course, banks will likely pass through the costs to their customers but that is preferable to another taxpayer bailout. The stockholders, bondholders and management of these institutions are not being bailed out as in previous debacles which is appropriate. Hopefully we won’t see the same executives recirculate to cause future damage as occurred here with former Lehman and Deutsche Bank executives manning important risk management and related posts at SIRV. The art of failing upward is one of the most depressing characteristics of the financial industry and we need to hold people accountable for their serial incompetence.
This crisis may trigger the next leg down in the bear market because it should highlight to even the most thick-headed among us the lagged effects of monetary policy. It will be even harder to argue that the system can simply shrug off higher interest rates without structural damage. The only thing that can save bulls now is a reversal of Fed interest rate hikes which are highly unlikely unless we see a broader banking collapse. The Fed may pause interest hikes but that is a far cry from reversing them, leaving rates at their current higher levels to work their mischief throughout the system.
David Rosenberg:
Most of the above has been well covered by the mainstream media but one critical implication has not been — the impact on the real economy from having trillions move out of bank deposits into government securities like T-bills. This is because in a fractional banking system such as ours, banks can use $1 of deposits to make $10 of loans. Conversely, money placed in government securities is, by comparison, fairly inert. Thus, a significant reduction in deposits is a massive problem.
One of my most confident calls right now is that trillions are in transit from bank deposit vehicles into government securities. If I’m correct, that’s a highly disinflationary development as it will crush money velocity once again. Basically, high-octane money is being shifted into low-octane mode. Consequently, it’s also exceedingly economic-growth inhibiting. For the time being, bank lending is very likely to be seriously impaired. Dismiss that risk at your great peril.
Prior to Friday, there was a legitimate debate as to whether a recession was imminent. Last week’s cataclysmic events seal the deal, in my view. The yield curve has not only proved prescient once again, but has demonstrated it is more than just predictive — it can actually be a prime catalyst causing an economic contraction.
A plausible positive counterargument is that the money will simply flow to the “too-big-to-fail” institutions, such as JP Morgan. That’s probable, possibly even a certainty, but it misses the crucial point: Almost no sentient person or company CFO will leave substantial sums in non-government-backed status at any bank. Consequently, the aforementioned money velocity is likely to have a wicked downside reversal after having perked up in recent years.
Yesterday, I posted this ING chart. Banks were already tightening their lending standards. They are unlikely to loosen them even with all that cash moving their way.
Source: Macrobond, ING
- If the 2-year yield declines another 11 bps today, it will be a bigger 3-day decline than the 1987 crash. Other 3-day declines of 100+ bps in 2-year yield took place when rates were much higher. In Oct 1987, the 2-year yield was double the current yield, and in the early 1980s it was more like triple current level. (@bespokeinvest)
- Interest rate futures now price in a 4% policy rate by the end of the year, down from a 5.56% guesstimate last Wednesday as well as from the current 4.57% effective rate.
Meanwhile, in this other magical world, “money” velocity is also slowing:
Crypto in many ways used to be a 24/7 market, but the escalating crisis among a set of small U.S. banks has upended that.
Regulators’ abrupt closure Sunday of Signature Bank following Silvergate’s shuttering last week knocked out the two biggest crypto-friendly banks and also means the round-the-clock payment systems both offered have disappeared.
Some signs of problems have already started to emerge. Crypto exchange Okcoin said that Signature was its primary bank for USD deposits, and temporarily paused U.S. dollar deposits along with wire and ACH transfers. And BCB Group, a U.K.-based bank, said Sunday it has delayed a pilot expansion in the U.S. of its European instant settlement network, originally scheduled for Monday.
Credit Suisse Finds Material Weaknesses in Financial Reporting The Swiss banking giant said in its delayed annual report that there had been material weaknesses in its financial reporting over the past two years because of ineffective internal controls. Its stock continued to fall after hitting a new low Monday.
- Credit Suisse Says Outflows Not Reversed, at Lower Levels The bank confirmed it had also dipped into liquidity buffers as a result of the withdrawals.
FYI:
- The S&P 500 Large Cap Index – 13/34–Week EMA Trend signal has reversed
(TradingView)
- Wilson reiterates his view and sums up his view: “…we view last week’s events as just one more supporting factor for our negative earnings growth outlook…In short, Fed policy is starting to bite, and it’s unlikely to reverse even if the Fed were to pause its rate hikes or quantitative tightening…i.e., the die is cast for further earnings disappointments relative to consensus and company expectations.” (The Market Ear)
MS
China’s Xi Plans to Speak With Zelensky for First Time Since Ukraine War Broke Out