Arizona, March 14, 2023. – Looking back, before last week’s spectacular collapse of Silicon Valley Bank, there were warning signs that were overlooked not only by investors but also by banking regulators. Why the oversight failed remained a hot question among banking experts, with some focusing on the weakness of US regulations. (Photo by REBECCA NOBLE/AFP) (Photo by REBECCA NOBLE/AFP via Getty Images)AFP via Getty Images
The sudden collapse and FDIC seizure of Silicon Valley Bank (SIVBQ) on March 10 caused a loss of confidence in the banking system. While the analysis shows that US banks are generally solvent, concerns about the banks lingered and became a global phenomenon. The challenge in analyzing bank security is that a severe loss of trust can actually distress an otherwise functioning financial institution. This analysis uses a systematic methodology to monitor banking system stresses on a weekly basis via the US Banking System Stress Monitor. Aside from market price data and sovereign money market fund asset flows, banking data comes from the Federal Reserve’s H.4.1 and H.8 weekly reports, released Thursday and Friday, respectively.
Big banks outperformed the S&P 500 this week for the first time since the crisis began, buoyed by better-than-expected earnings from four big banks and generally supportive forward guidance add color to less optimistic data. Despite the better performance this week, the KBW Bank Index is down almost 18% year-to-date. Measured against the KBW regional bank index, smaller bank stocks have lost almost 22% since the beginning of the year.
Prices for bank stocks and CDS
Glenview Trust, Bloomberg
Credit Default Swaps (CDS) prices are less well known but available in real-time. Put simply, CDS acts as an insurance policy that investors can purchase that will pay off in the event of a borrower’s default. A higher price of a CDS reflects a higher probability of default by the borrower. CDS prices for four of the US global systemically important banks (G-SIBs) fell on better earnings data and are near their lowest since the beginning of this crisis.
Bank CDS Prices
Glenview Trust, Bloomberg
A simple way to gauge the stress in the US banking system is the level of bank support provided by the Federal Reserve through various agencies. The most common is the discount window, which banks generally avoid, but the facility can provide emergency liquidity. In addition, following the collapse of the Silicon Valley bank, the Federal Reserve announced a new facility to help banks meet depositor withdrawal requests and restore confidence. The Bank Term Funding Program (BTFP) allows banks to borrow the face value of all government bonds held in the bank’s portfolio at a very favorable interest rate. The Paycheck Protection Program (PPP) facility was created in 2020 to provide support during the pandemic. Another loan is to support the bridge banks operated by the Federal Deposit Insurance Corporation (FDIC) until they can be sold or liquidated.
Whole bank support facilities
Glenview Trust, Bloomberg
With the seizure of Silicon Valley Bank and Signature Bank, the use of rebate windows and bridge bank loans skyrocketed. Previously, there was a marked shift from discount window funding to utilizing the Bank Term Funding Program (BTFP). A positive development this week was a reduction in the rebate window and BTFP usage. In addition, the loans used by the bridge banks declined as the FDIC made some progress in winding down the failed banks. Overall, the reduction in Fed bank lending across all four available facilities suggests that the impact of the banking crisis is easing.
Weekly Fed Bank Facility Changes
Glenview Trust, Bloomberg
Bank deposit outflows stopped and deposits rose for the first time since the crisis began at large, small and foreign-linked banks. In particular, the 25 largest banks, including many mid-sized regional banks, have gained deposits since the collapse of Silicon Valley Bank, while the smaller banks have lost deposits.
bank deposits and loans
Glenview Trust, Bloomberg
Small banks saw another deposit inflow of $28.2 this week. Notably, there was no downside revision for small deposits for the previous week.
Weekly change in deposits at small US banks
Glenview Trust, Bloomberg
Cash continued to flow into sovereign money market funds, confirming the pressure on depositors to exit the banking system. In particular, the pace of inflows into sovereign money market funds has slowed significantly since the peak of the banking crisis. Also known as “cash sorting,” this movement shows that savers are seeking higher returns while avoiding the credit risk with banks. Cash sorting began before the crisis began but seems likely to continue to some extent while short-term US Treasury yields exceed the rates banks are paying depositors.
fund assetsGlenview Trust, Bloomberg
Banks continued to lend despite the crisis, but total bank lending was negative again this week, driven by smaller and more foreign-linked banks. Credit growth is likely to slow as banks are forced to hoard additional liquidity to bolster their defenses against possible additional deposit flight and increased loan losses. The first signs of a potential credit crunch in commercial real estate (CRE) lending began to appear over the past two weeks, as lending to this segment fell at the sharpest rate on record. Small bank commercial real estate lending was marginally higher this week. Smaller banks are the leading providers of commercial real estate loans, so this sector could face reduced credit availability.
Weekly Change in CRE Loans: US Small Banks
Glenview Trust, Bloomberg
Commercial and industrial (C&I) loans have also declined at small banks over the past three weeks. Again, this is a divergence between big and small banks, as C&I loans from big banks have grown slightly over the same period.
Weekly Change in C&I Loans: US Small Banks
Glenview Trust, Bloomberg
In summary, the US banking system has continued to recover from the extremes of the crisis. On a particularly positive note, small and large banks saw deposit inflows. As the severity of the banking crisis subsides, the real economic impact is now visible. Lending from smaller banks has contracted for three straight weeks, but this week’s decline was much smaller. The divergence between big and small banks is a critical part of this crisis, as big banks saw net deposit growth rather than a contraction for small banks. The future availability of commercial real estate loans is likely to be impacted as smaller banks have historically provided the majority of these loans. Significantly, as deposits return to the smaller banks, lending should recover and perhaps a credit crunch can be avoided. Other things being equal, a tightening of the availability of bank credit makes a US recession in 2023 more likely.
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Disclosure: Glenview Trust holds JP Morgan (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and Goldman Sachs (GS) within its recommended investment strategies.
I am the Chief Investment Officer of The Glenview Trust Company, which provides wealth management, wealth and financial planning to wealthy families. I appear frequently on US and international television and have been featured on ABC, Bloomberg, Bloomberg Asia, CNBC, CNBC Asia, Fox Business and NHK World. Previously, I was Global Chief Investment Strategist for PNC Asset Management Group. With over $140 billion in assets under management at PNC, I served as the primary driver of asset allocation and model portfolio construction for high net worth individuals, family offices and institutional investors. I began my career on Wall Street as a financial analyst at Salomon Brothers, where I first met Warren Buffett. I have a bachelor’s degree from the University of Dayton and an MBA from the University of Pittsburgh. I also earned Chartered Financial Analyst® (CFA®) and Chartered Market Technician (CMT) designations.
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