The Silicon Valley Bank and Signature Bank collapses set off a week of wild volatility, market fear (risk-off), massive new rescue facilities from governments and money center banks, and the dust hasn’t settled. The events have also sharpened the divide between the “Too Big To Fail” money center banks and the regional banks. The TBTF banks have more stringent capital requirements and are in better shape to withstand volatility. The latest attempt (announced today) to stabilize First Republic Bank involves 11 major banks depositing $30 billion in FRB as a sign of confidence. This is on top of Sunday’s announcement of the Bank Term Funding Program (BTFP) which allows banks to borrow against their portfolio of secure bonds (Treasuries/MBS/Fannie and Freddie Securities) at par (the original price) and not today’s mark to market value (less than the original price due to rate increases). This is a critical facility as the Fed’s rapid rate increases have left many banks in a potentially illiquid position. Banks bought Treasuries in 2019-2022 while prices were high and yields were ultra low. Depositors poured money into banks during this low rate environment. The spike in Treasury yields over the past year drained deposits out of banks and into Treasuries, Money Market Funds, etc – and left Banks in a cash poor position while holding devalued collateral. This week has also seen a $50 billion rescue facility implemented by Switzerland’s central bank for Credit Suisse, a major international bank twice the size of SVB. Today has been the calmest day in markets since the SVB collapse last Friday…
What about next week’s Fed Meeting? Next week’s Fed meeting will present a conundrum for Powell and friends. Today is the one year anniversary of the first rate increase of this cycle of hikes. The Fed has spent a year tightening financial conditions, draining liquidity from the system, etc. Their intent was to pressure Main Street (employers, consumers, retailers, etc.), but their measures are now putting pressure on the financial system. Will the “cracks in the system” possibly spur the Fed to pause the increases at next Wednesday’s meeting? Maybe the focus should be on a suspension of Quantitative Tightening. The Fed is selling/rolling off $95 billion of bonds a month. Remember that the Fed was purchasing $80 billion of bonds per month last March. The selling devalues bonds while draining liquidity out of the system. The recent data (CPI as expected, PPI deflationary) may give Powell enough breathing room to “talk tough and pause.” Another possibility: Acknowledge financial market stress (“We’re monitoring it closely”), raise rates 25 bps and stop QT completely (or even start QE again?). Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners
