Evening Brief – 03.13.23

The collapse of regional banks like Silicon Valley Bank (SVB), Silvergate Capital, and Signature Bank has led to significant jitters in the financial markets, reviving memories of the collapse of Lehman Brothers, which triggered the financial crisis in 2008.

The extent to which the Federal Reserve, Treasury Department and Federal Deposit Insurance Corp’s actions constitute a bailout depends on who you ask; equity holders aren’t getting any relief, but depositors with uninsured balances are. The long-term costs of underwriting moral hazard remain to be seen, but the short-term costs of not doing so appeared very frightful.

While an immediate crisis may have been averted, the risk of future failures has not; banks still face plenty of challenges from higher rates and investors are likely to remain more attentive to reserves and other risks that had arguably been getting less attention than they were due.

Government regulators have taken material actions with significant monetary backstopping; exactly what public authorities should do to prevent a run on banks. The chances of panic have declined since Friday, but it’s worth keeping an eye on “at-risk” banks for now.

Meanwhile, the failure of Silicon Valley Bank and the Federal Reserve introducing a new type of quantitative easing to backstop the banking sector has investors increasingly betting that the central bank will not hike rates – at least not at its March 21-22 meeting.

It’s hard to tell precisely what all this means for the Fed’s upcoming decisions given the significant volatility, but on net it looks likely to result in fewer hikes. Talk of a 50bps hike at the March meeting has faded dramatically – down to 66% from Friday – and as of Monday the 2-year yield has dropped 90bps over the last week.