The fallout from this month’s banking turmoil – the sudden run of banks and the collapses of Silicon Valley and Signature Bank – has been widespread. In the aftermath, the global banking system was shaken.
More twists in store for next week. But this does not mean that this is a repeat of the global financial crisis 15 years ago. Daily customer deposits are guaranteed and regulators around the world say the banking system remains sound.
Credit Suisse and First Republic: Two more banks fluctuated, but remained flat all week. The beleaguered megabank Credit Suisse announced last week that it would need up to $53.7 billion in support from the Swiss Central Bank to stay afloat. Meanwhile, First Republic Bank received $30 billion on Thursday from some of the largest banks in the United States.
However, this lifeline may not be enough to keep her afloat. Shares traded in the US in Credit Suisse fell about 7% and First Republic shares fell about 33% on Friday. JPMorgan analysts wrote this week that a UBS takeover of Credit Suisse looks likely.
US commercial banks’ earnings are 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 base was largely from the struggling tech and cryptocurrency sectors. She said these banks also hold an unusually large percentage of their customers’ deposits in Treasury securities – which fell in value when the Fed started raising interest rates.
The First Republic does not have the same problems as Silicon Valley Bank. Long-term Treasury notes accounted for 55% of all SVB assets and only 15% of First Republic.
“Ultimately, investors need to decide whether these individual/private crises add to growing concerns, or if they mark the beginning of crisis contagion,” Shah wrote in a note last week.
Another red flag: But these meltdowns may not be entirely private.
Before it collapsed, SVB became it largest borrower affiliate Federal Home Loan Bank in San Francisco. The FHLB has been calledlender of last resortBy Federal Reserve staff. Silvergate Bank, another recently collapsed bank, has been hugely supportive of the cryptocurrency sector as well. I borrowed heavily from the FHLB system, according to Brookings Institution.
First Republic was also a large FHLB borrower. The bank secured $14 billion in loans at the end of 2022, up from just $3.7 billion in 2021.
Another bank that has taken large FHLB loans in San Francisco is Western Alliance. Shares of the regional bank have also been turbulent this week, ending Friday down more than 15%.
“There is nothing wrong with using lending tools of last resort to deal with an overheating economy,” Bank of America economists Ethan Harris and Shruti Mishra wrote on Friday.
But it raises red flags. There was a sharp increase in borrowing from the Fed’s discount window to $153 billion from $5 billion just last Wednesday. This is the largest amount of borrowing on record.
“The sharp increase in banks’ emergency borrowing from the Fed’s discount window speaks to funding and liquidity pressures on banks, driven by weak depositor confidence in the wake of one bank shutdown and two bank failures,” Moody’s analysts wrote last week. He said, “It is in line with Moody’s negative view of the US banking system.”
Be vigilant, but don’t panic: So what should a worried investor or bank customer do? Analysts say to be calm and alert. “Looking forward, investors will need to keep an eye on what is going on in regional banks with deposits, consumer lending and corporate lending,” said Torsten Slok, chief economist at Apollo Global Management.
dead around the face
Meta Platforms shareholders rejoiced last week after founder and CEO Mark Zuckerberg announce A long overdue shift in the company’s strategy and actions to enhance its balance sheet.
The tech giant said last Tuesday that it plans to cut 10,000 additional workers, marking the second massive round of layoffs in four months. Zuckerberg said in a letter to employees that same day that the company is shifting its focus away from artificial intelligence.
These changes come after Facebook Rebranded to Meta last year to signify its costly shift to the virtual world. Shareholders reacted negatively to the company’s strategy and demanded cost-cutting as the Federal Reserve raised interest rates, adding pressure to markets and the economy. Accordingly, stock shares are down about 70% in 2022.
So, what does “meta shift” mean? Analysts say cost-cutting measures and a shift to artificial intelligence are what Wall Street has been waiting for all along.
Investors certainly seem happy. Meta shares rose about 9% last week.
“The layoffs have been music to the ears of investors who are sick and tired of Zuckerberg and Facebook spending money like an ’80s rock star over the past few years,” said Dan Ives, senior equity research analyst at Wedbush Securities.
The company’s shift in focus on AI helped convince investors that the Meta is focused on improving current performance rather than the metaverse, which could take years to monetize.
Moreover, the company’s AI priority comes as its competitors consolidate their shares in the space, suggesting that Meta doesn’t want to be left behind other tech giants in the AI frenzy. Microsoft said in February that it was using ChatGPT driving technology for its Bing search engine. Google announced its AI product, Bard, the day before.
While some believe Meta is out of the woods when it comes to its luxury woes, it likely has a tough road ahead when it comes to competing with peers in the tech giant.
“There is a Game of Thrones spin in the tech world around AI,” Ives said. “They have clear growth challenges ahead.”
Monday: Christine Lagarde, President of the European Central Bank, speaks; Weekly reserve balances are released with the Federal Reserve Banks.
Tuesday: Existing home sales in the United States.
Wednesday: The Federal Open Market Committee (FOMC) released its latest decisions on the interest rate and economic outlook. Federal Reserve Chairman Jerome Powell answers questions from reporters.
Thursday: The Bank of England releases its latest interest rate decision; US building permits, new home sales, and initial jobless claims.
Friday: US Durable Core Orders and Purchasing Managers Index (PMI).
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