The latest US banking crisis reveals a surprising cause: US Treasuries. Silicon Valley Bank found itself in a position where it needed to sell Treasury holdings, as well as mortgage bonds backed by government agencies, at steep losses — driven by the Federal Reserve’s fastest rate-hiking pace in decades — after its clients started yanking out their money. “We always refer to Treasuries as the world’s safest asset,” says Paul McCulley, the former chief economist for Pacific Investment Management Co. “That’s from the standpoint of credit quality. That’s not from the standpoint of asset price stability. There’s a huge difference.”
— Kristine Aquino | Bloomberg 5 Things to Start Your Day | 03/29/23
SVB Collapse Shows US Treasuries Aren’t a Risk-Free Asset
— Liz McCormick, Ben Holland and Edward Harrison | Bloomberg | 03/28/23
Inflation and Monetary Policy
Recession warning: Minneapolis Fed President Neel Kashkari said recent bank turmoil has increased the risk of a US recession. “What’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch. Would that slow down the economy? This is something that we’re monitoring very, very closely,” Kashkari, a voter on monetary policy this year, said in an interview on CBS’s “Face the Nation.” Before this month’s bank collapses and market turmoil, Kashkari had said the Fed should lift rates to about 5.4% — from a target range of 4.75% to 5% currently — and then hold them there until inflation cooled.
— Kristine Aquino | Bloomberg 5 Things to Start Your Day | 03/27/23
Bond investors are piling into wagers that a US recession is around the corner amid a growing dissonance between how markets and the Fed see the economic outlook. The gap is particularly evident in the yield curve, which is headed for its steepest monthly increase since October 2008. — Alexandria Arnold | Bloomberg Risky Business | 03/26/23
The US Federal Reserve raised interest rates by a quarter percentage point and indicated there may be more hikes to come. In doing so, the Fed signaled that, banking turmoil or not, its battle against inflation must go on. Forecasted rate hikes were unchanged, too.
Chair Jerome Powell emphasized his belief that the banking system remains resilient… Treasury Secretary Janet Yellen said on Capitol Hill that regulators aren’t looking to provide “blanket” deposit insurance, despite calls from some quarters to raise it beyond the current level of $250,000. — Margaret Sutherlin | Boomberg Evening Briefing | 03/22/23
Anyone out there betting the US Federal Reserve will actually cut rates this year has got it very wrong, says BlackRock. The world’s biggest money manager has taken a dim view of Wall Street wishful thinkers who expect rate cuts, given the continuing risk of recession. But BlackRock’s position runs counter to that of TD Securities and DoubleLine Capital, both of which contend the Fed is mistaken about the need to keep raising rates. The collapse of three mid-size US banks and the forced marriage of Credit Suisse to UBS may have prompted a rethink by some on monetary policy, but Fed Chair Jerome Powell made clear with a fresh rate hike that the inflation fight will go on.
— Margaret Sutherlin | Boomberg Evening Briefing | 03/28/23
SOMETHING has to give: Either the March jolt starts showing in the real economy, with tighter financial conditions flowing through to lower hiring and investing. OR the rate cut bets are going to have to go away, because right now the two don't seem consistent.
— David Goodman | Bloomberg 5 Things to Start Your Day | 03/28/23
With some jittery depositors shifting their money from regional banks to large ones, at least some banks are lifting their savings account and CD rates to incentivize customers to stay put or to attract new money to replenish reserves, analysts say.
“It’s likely that concerns about maintaining deposit levels have put upward pressure on some deposit rates at some banks,” says Ken Tumin, founder of DepositAccounts.com, which tracks bank savings and CD rates. Banks, he says, want to “shore up their deposits to reduce the odds of being hurt by a bank run.”
Some online banks, in particular, have increased deposit rates because it’s easier for their customers to move money to competitors, he says.
Banks may be hiking savings rates to hold on to customers amid SVB crisis — Paul Davidson | USA Today | 03/27/23
Americans are going all-in on cash. That could spell more trouble — Nicole Goodkind | CNN | 03/24/23
Investors are fleeing to cash in the biggest rush since the onset of the pandemic, according to Bank of America strategists. They predict equity and credit markets will slump in the coming months. — David Rovella | Bloomberg Evening Briefing | 03/24/23
BofA Says Investor Rush to Cash Is Fastest Since Covid Hit — Farah Elbahrawy | Bloomberg | 03/24/23
Is the Global Banking System In Trouble?
SVB showed “classic red flags for bank examination 101,” said Aaron Klein, a senior fellow at the Brookings Institution. “Finding problems late and moving slowly is a recipe for supervisory failure. It sure looks like that’s what happened here.”
“The supervisory process has not evolved for rapid decision making. It is focused on consistency over speed,” said Eric Rosengren, former president of the Federal Reserve Bank of Boston. “In a fast-moving situation, the system is not as well-designed to force change quickly.”
How Bank Oversight Failed: The Economy Changed, Regulators Didn’t
— Andrew Ackerman, Angel Au-Yeung and Hannah Miao | WSJ | 03/24/23
For banks with assets between $1 billion to $10 billion, CRE loans comprised about 33% of the total held on their books, according to estimates by ratings agency Fitch. At the end of last year, CRE only made up about 6% of loans held by larger banks that had total assets of more than $250 billion, it said.
Goldman Sachs economists estimate the combined share of small and mid-sized banks, including lenders with less than $250 billion in assets, is 80% of the overall stock of commercial mortgage loans…
"Banks will be primarily exposed to CRE through bank loans on the balance sheet," … The total exposure of the U.S. banking system to CRE loans was $2.5 trillion at the end of December, Fitch said.
Analysis: Small U.S. banks imperiled by big office loans — Saeed Azhar and Matt Tracy | Reuters | 03/24/23
For much of the pandemic, buildings in central locations that feature modern amenities fared better than their less-pricey peers. Some even were able to increase rents while older, cheaper buildings saw surging vacancy rates and plummeting values. Now, these so-called class-A properties, whose rents generally fall into a city’s top quartile, are increasingly coming under pressure.
Rising interest rates have hit the entire commercial real-estate sector hard. Higher mortgage costs eat into landlords’ earnings and make it harder to refinance expiring loans. Rising yields on bonds and other securities also make real estate look less profitable in comparison, making buyers more reluctant to pay high prices and pushing down property values. Real estate analytics firm Green Street recently estimated that U.S. property values are down 15% since March 2022.
Not all commercial property sectors are suffering equally. While the values of hotels and rental-apartment buildings have fallen, these properties are also benefiting from inflation, which is pushing up room rates and apartment rents. Office buildings have seen a steeper drop in values partly because they are also grappling with weak demand from tenants who are cutting back on workspace. Green Street estimates that office values are down 25% over the past year. Distress in Office Market Spreads to High-End Buildings — Konrad Putzier | WSJ | 03/28/23
"We're seeing tenants move out of commodity spaces and into the very best offices they can afford," David Smith, Cushman & Wakefield's head of global occupier insights, said. "It's left older spaces that haven't seen reinvestment less likely to find takers."...
Commercial real-estate financing is generally structured differently than residential mortgages. The loans often don't amortize and include only interest payments, meaning that when they expire, usually after a period of 10 years, owners must replace them with mortgages of commensurate size. In a market where building values have fallen — the National Council of Real Estate Investment estimated that average office values reported by its members fell 7.4% in 2022 — and lenders have become more cautious, that swap has become increasingly difficult…
"We are currently valuing those deals in an enormously wide band," Levy said of office loans, in particular. "50 to 90 cents on the dollar."
Office Doom Loop: Landlords Face a Reckoning As Companies Move to Fancy Offices
— Daniel Geiger | Business Insider | 03/30/23
If half the uninsured depositors decide to withdraw their funds after the recent bank instability, it could put hundreds of billions of dollars of deposits in jeopardy.
“If uninsured deposit withdrawals cause even small fire sales [of assets], substantially more banks are at risk”
“Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the U.S. banking system.”
As of December 31, 2022, U.S. banks had unrealized losses of $1.7 trillion which were nearly equal to banks’ total equity of $2.1 trillion
Of $17 trillion in total U.S. bank deposits, nearly $7 trillion are currently not insured by the FDIC
Research Paper: Why do banks invest in MBS? — Itamar Drechsler, Alexi Savov, and Philipp Schnabl* | NYU | 03/13/23
U.S. Banks are sitting on $1.7 trillion in unrealized losses. That's not a problem—until it is — Will Daniel | Fortune | 03/23/23
Inflation’s clearly a global problem right now, and everybody’s focused on containing it before it gets unhinged. Inflation in the US and in Europe is going to stay higher for longer... The unprecedented amount of fiscal spending was really what kicked that into gear, not just in the US but across the world. And if you really think about it: Are we cutting back on that? We are — but we’re not cutting back on it as quickly as we put it in. And so it’s still lingering out there and it’s still going to create inflation.
— Que Nguyen, chief investment officer of equity strategies at Research Affiliates
As banks fail and regulators strive to arrange rescues, there’s much talk that we’ve turned back the clock 15 years to the Global Financial Crisis. I’d like to suggest that instead we are finally confronting the costs of decisions made almost exactly 25 years ago, in the first two weeks of April 1998… No, It's Not Like 15 Years Ago. What Matters Is 25 — John Authers | Bloomberg | 03/23/23
Global Layoffs Extend Far Beyond Big Tech — Mathieu Benhamou, Jennah Haque, Phil Kuntz, Jo Constantz | Bloomberg | 03/21/23