Global banks just suffered their worst week since 2008. So what comes next?
The fallout from this month's banking turmoil — the surprising bank runs and collapses of Silicon Valley Bank and Signature Bank — has been widespread. In its wake, the global banking system has been shaken.
Credit Suisse and First Republic: Two more banks wobbled but remained upright through the week. Beleaguered megabank Credit Suisse announced last week that it will take up to $53.7 billion in support offered by the Swiss central bank to stay afloat. Meanwhile, First Republic bank received a $30 billion lifeline on Thursday from some of the largest banks in the United States.
Still, those lifelines might not be enough to keep them afloat. US-traded shares of Credit Suisse were down nearly 7% and First Republic shares plunged by about 33% on Friday. JPMorgan analysts wrote this week that a UBS takeover of Credit Suisse seems likely.
US commercial banks' profits have been under pressure from deteriorating asset quality, slowing loan growth and rising deposit rates, said Seema Shah, chief global strategist at Principal Asset Management.
But SVB and Signature Bank were unique in that much of their deposit bases were largely from the struggling tech and crypto sectors. These banks also held an unusually large proportion of their customer's deposits in Treasuries — which had dropped in value as the Fed started hiking interest rates, she said.
First Republic doesn't have the same problems Silicon Valley Bank did. Long-term treasury bonds made up 55% of all SVB assets and just 15% of First Republic's.
"Ultimately, investors need to decide if these individual/idiosyncratic crises add up to growing concerns, or mark the start of crisis contagion," Shah wrote in a note last week.
Another red flag: But these meltdowns may not be totally idiosyncratic.
Before its collapse, SVB had become the largest borrower of the Federal Home Loan Bank in San Francisco. The FHLB has been called a "lender of next-to-last resort" by Fed staff. Silvergate Bank, another recently collapsed bank that largely supported the cryptocurrency sector, also borrowed heavily from the FHLB system, according to the Brookings Institution.
First Republic has also been a large borrower from the FHLB. The bank had about $14 billion worth of loans from them at the end of 2022, up from just $3.7 billion in 2021.
Another bank that has taken out significant FHLB loans in San Francisco is Western Alliance. Shares of the regional bank were also tumultuous this week, and ended Friday down more than 15%.
That doesn't mean that banks taking money from the FHLB and participating in the Federal Reserve's emergency Bank Term Lending Program, which lent out $12 billion to banks this week, are in big trouble.
"There is nothing wrong with using lender of last resort tools to deal with an overheating economy," wrote Bank of America economists Ethan Harris and Shruti Mishra on Friday.
But it does raise red flags. There has been a sharp increase in borrowing from the Fed's discount window to $153 billion from $5 billion just last Wednesday. That's the largest amount of borrowing on record.
"The sharp increase in banks' emergency borrowing from the Fed's discount window speaks to the funding and liquidity strains on banks, driven by weakening depositor confidence following one bank winddown and two bank failures,'' wrote Moody's analysts last week. The data, they said, is "in line with Moody's negative outlook on the US banking system."
Stay vigilant, but don't panic: So what's a worried investor, or bank customer, to do? Stay calm, but vigilant, say analysts. "Looking ahead, investors will need to monitor what is going on in regional banks with deposits and lending to consumers and lending to corporates," said Torsten Slok, chief economist at Apollo Global Management.
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