Evening Brief – 03.14.23

A day after a historic decline in US regional banks, which saw many shed 50% or more of their market cap, these banks staged a strong comeback Tuesday, as concerns about wider contagion in the financial system from the Silicon Valley fallout eased.

First Republic Bank rose as much as 63% for its biggest intraday gain ever, which comes on the heels of a record decline on Monday, while PacWest Bancorp climbed 64% and Western Alliance Bancorp jumped 53%.

But all may not be well. Ratings agency Moody’s placed First Republic Bank and five other US lenders on review for downgrade, the latest sign of concern over the health of regional financial firms.

In First Republic’s case, the issue isn’t only a shrinking deposit base or too many uninsured deposits; it’s a more direct spillover from Silicon Valley tech startup connections and the banks’ concentration in long-term assets. At the end of last year, the bank held over 60% in maturities of five years or longer on its books, which is a higher share than SVB had before its collapse.

The selloff can be contained if there is a clue that Fed policy is shifting, although that remains to be seen following the CPI data. Headline CPI rose 0.4% in February and 6% from a year ago – in line with expectations – while core CPI rose 0.5% in February, slightly above 0.4% estimates, and 5.5% annually.

The markets are now pricing in a 73.1% chance of a 25bps hike, and 26.9% probability of no hike at all, according to the CME FedWatch Tool. Just a week earlier, markets were pricing a 69.8% chance of a 50bps hike and 30.2% probability of a 25bps hike.

Bank runs don’t come full stop and we have yet to see how much money continues to flow out of small banks, whose assets may be propped up courtesy of the latest bailout facility. At this point it’s all about their liabilities.