Regional banks (there are more than 4,000 in the United States) remain under pressure. The exodus of deposits continues despite assurances from leaders that the banking system is sound. Depositors, especially those with deposits over US$250,000, withdraw their money. Deposits of US$250,000 and under are insured by the Federal Deposit Insurance Corporation (FDIC). Reuters, quoting Goldman Sachs, says deposits have flowed out of US bank vaults into money market funds, very safe short-dated Treasury securities. For its part, the ABC network reported that Wells Fargo (1.7 trillion in assets, 4th largest American bank) recorded net deposits this week, undoubtedly from customers of regional banks.
Two regional banks, Silicon Valley Bank (SVB), in California, and Signature Bank, in New York, had to close their doors following a bank run. Customers rushed there to withdraw their money, and institutions ran out of funds. The FDIC took control of the banks. Last weekend, the Treasury, the FDIC and the Federal Reserve (Fed) agreed to cover all of the deposits of the two institutions (even those uninsured), and the Fed agreed to offer a credit facility by accepting as collateral for depressed assets like US government bonds. The crisis was caused by the steep rise in interest rates over the past year which caused the value of financial assets such as bonds to plummet. (Bond prices move inversely to interest rates.) During the pandemic, the SVB had purchased a lot of US government bonds with the money it received from its tech depositors. With bonds having lost value with rising interest rates, when depositors began demanding their money last week, there was a shortage in the vaults of both banks and word spread.
On Thursday, First Republic received deposits of US$30 billion from 11 major financial institutions. With this money, she can reimburse her clients who claim their money without having to sell depressed assets like US government bonds. First Republic is a regional bank of comparable size to that of SVB, with which it shares the characteristic of having a concentrated base of middle-income customers.
Not according to the stock market. First Republic Bank shares lost another 30% of their value on Friday. Since March 8, 80% of its market valuation has evaporated. “When an extreme event affects the financial system or a major economy, such as the collapse of SVB, which rattled the U.S. regional banking system and weighed on stock markets around the world,” write economists Claire Fan and Carrie Freestone, of the Royal Bank, in a note to clients, “it usually takes more than a few days for the markets to recover. The repercussions and volatility can span weeks and spread to other geographies, as seen with the Credit Suisse setbacks.
The institution founded in 1856 is grappling with issues that are specific to it and that are known to the market. Its stock has been under pressure since the start of 2021. further deteriorated, leading to a further fall in banking stocks and stock markets around the world, ”summarize the economists of the Royal. On Tuesday, Credit Suisse acknowledged “significant deficiencies” in its risk assessment. On Wednesday, the National Bank of Saudi Arabia, a major shareholder in Credit Suisse, rejected the idea of injecting capital into it. On Thursday, its main competitor, UBS, said it opposed a forced merger with Credit Suisse, according to Bloomberg. On the same day, the Swiss central bank granted the ailing bank a credit line of around US$54 billion.
The title of Credit Suisse lost Friday 8% of its value on the New York Stock Exchange. “Investor concerns center on the viability of a proposed spin-off of the investment division to focus on its domestic and wealth management businesses,” reported London’s The Telegraph.
The impacts are likely to be felt in the Fed’s monetary policy. In this regard, Desjardins Group’s analysis is hardly encouraging. “[P]olicymakers have to admit it: The story they told was wrong,” Royce Mendes, managing director and chief macro strategist, wrote in a note Friday. “Instead of achieving its goal of price stability without disrupting markets and the economy, the Fed is now failing in two of its three terms. Inflation remains too high, and the financial system is now in trouble. Next week, the Fed will have the unenviable task of having to weigh both financial instability and excessive inflation. He foresees a 25 point rise in interest rates, as does Mathieu Marchand, independent economist from Quebec. “By pumping billions into US banks in the form of loans [US$300 billion in one week, the Fed said on Friday], the Fed is back to printing money again when it needs to fight inflation” , points out Mr. Marchand.
