Banks had a meltdown. What’s next?
New York (CNN) Global banks have just had their worst week since 2008. What’s next?
The aftermath of this month’s banking turmoil – the surprise bank runs and collapses of Silicon Valley Bank and Signature Bank – was widespread. As a result, the global banking system was shaken.
More volatility is on the cards for the coming week. But that doesn’t mean this is a repeat of the global financial crisis of 15 years ago. Everyday customers’ deposits are guaranteed and regulators around the world say the banking system remains healthy.
Credit Suisse and First Republic: Two other banks shook but held up throughout the week. Troubled megabank Credit Suisse announced last week that it will need up to $53.7 billion in support from the Swiss central bank to stay afloat. Meanwhile, First Republic Bank received a $30 billion lifeline from some of the largest banks in the United States on Thursday.
Still, these lifelines may not be enough to keep them afloat. U.S.-traded shares of Credit Suisse fell nearly 7% on Friday and shares of the First Republic fell about 33%. Analysts at JPMorgan wrote this week that a UBS takeover of Credit Suisse is likely.
US commercial bank profits have been squeezed by deteriorating asset quality, slower credit 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 came largely from the struggling technology and crypto sectors. Those banks also held an unusually large portion of their customers’ deposits in government bonds — which had fallen in value when the Fed began raising interest rates, she said.
First Republic doesn’t have the same problems as Silicon Valley Bank. Long-dated government bonds accounted for 55% of all SVB assets and just 15% of First Republic’s assets.
“Ultimately, investors must decide whether these individual/idiosyncratic crises are a growing concern or mark the beginning of crisis contagion,” Shah wrote in a statement last week.
Another red flag: But these meltdowns may not be entirely idiosyncratic.
Before its collapse, the SVB had become the largest borrower from the Federal Home Loan Bank in San Francisco. The FHLB has been labeled a “lender of last resort” by Fed officials. Silvergate Bank, another recently collapsed bank that largely supported the cryptocurrency sector, has also borrowed heavily from the FHLB system, according to the Brookings Institution.
First Republic was also 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 made significant FHLB loans in San Francisco is Western Alliance. Regional bank shares were also tumultuous this week, ending Friday down more than 15%.
That doesn’t mean banks that take money from the FHLB and participate in the Federal Reserve’s emergency bank lending program, which lent $12 billion to banks this week, are in big trouble.
“There is nothing wrong with using lender of last resort to deal with an overheated economy,” Bank of America economists Ethan Harris and Shruti Mishra wrote on Friday.
But the red flag is waving. There was a sharp increase in borrowing from the Fed’s discount window to $153 billion from $5 billion just last Wednesday. That’s the largest borrowing on record.
“The sharp surge in bank emergency lending from the Fed’s discount window speaks to banks’ funding and liquidity constraints, reflecting weakened depositor confidence following a bank resolution and two bank failures,” Moody’s analysts wrote last week. The data, she said, is “consistent with Moody’s negative outlook on the US banking system.”
Stay alert, but don’t panic: So what should a concerned investor or bank customer do? Remain calm but alert, analysts say. “Looking ahead, investors need to watch what’s happening in regional banks with deposits and lending to consumers and lending to businesses,” said Torsten Slok, chief economist at Apollo Global Management.
Meta Platforms shareholders rejoiced last week after founder and CEO Mark Zuckerberg announced a long-awaited change in company strategy and actions to strengthen the balance sheet.
The tech giant said last Tuesday it plans to cut another 10,000 employees, marking its second massive round of layoffs in four months. Zuckerberg said in a letter to employees the same day that the company was shifting its focus from the Metaverse to artificial intelligence.
These changes come after Facebook changed its name to Meta last year to mark its costly shift to the virtual world. Shareholders reacted negatively to the company’s strategy, calling for costs to be cut as the Federal Reserve hiked interest rates and put pressure on markets and the economy. Accordingly, shares of the stock plunged about 70% in 2022.
So, what does Meta’s U-turn mean? Analysts say these cost-cutting moves and the move to AI are what Wall Street has been waiting for.
Investors certainly seem pleased. Meta shares are up almost 9% last week.
“The layoffs were music to the ears of investors tired of seeing Zuckerberg and Facebook spend like a 1980s rock star in recent years,” said Dan Ives, senior equity research analyst at Wedbush Securities.
The company’s shift in focus to AI has helped convince investors that Meta is focused on improving current performance and not the Metaverse, which could take years to monetize.
Additionally, the company’s prioritization of AI comes as its rivals cement their own holdings in the space, suggesting that Meta doesn’t want to lag behind other tech giants in the AI craze. Microsoft said in February that it uses ChatGPT technology for its Bing search engine. A day earlier, Google had announced its own AI product, Bard.
While some believe Meta is out of the woods when it comes to its flamboyant issues, it will likely have a tough road ahead when it comes to competing with its tech giants.
“There’s a game of thrones in technology around AI,” Ives said. “They have clear growth challenges ahead.”
Monday: European Central Bank (ECB) President Christine Lagarde speaks; Weekly reserve balances at the Federal Reserve Banks are released.
Tuesday: Selling Existing Homes in the USA.
Wednesday: The FOMC releases its latest interest rate decision and economic forecasts. Federal Reserve Chairman Jerome Powell answers reporters’ questions.
Thursday: The Bank of England releases its latest interest rate decision; US building permits, new home sales and initial jobless claims.
Friday: US Core Durable Good Orders and PMI.