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Evening Brief – 03.23.23

The Federal Reserve’s recent emergency measures have so far been successful in preventing a massive tightening of financial conditions; although corporate credit spreads have widened since the SVB failure, indicating worse borrowing conditions, the level is still below the July and October 2022 peaks.

Banks can access capital through the new $300bn BTFP loan program based on their written down bonds without selling US Treasuries and mortgage-backed securities at a sizable loss as SVB had to do, which provides some cushion for the banks and bond markets.

This is probably why the Fed was able to raise rates Wednesday. It can even keep QT alive. Meanwhile, the banks can avoid pain by accessing the BTFP program, effectively allowing them to have the best of both worlds – at least for now.

But this shouldn’t be mistaken for an all-clear sign. Several banks still remain at risk, as rate hikes have decimated the value of bonds held by these banks, and it could take time for the impact of the Fed’s measures to stabilize the system.

According to the Washington Post, the capital buffer in the US banking system totals $2.2tn. Meanwhile, total unrealized losses are between $1.7tn and $2tn. A second report by the Wall Street Journal cites a study from Stanford and Columbia Universities that found 186 US banks are in distress.

One thing is clear: the ongoing effects of the SVB collapse have worsened financial conditions while also reducing future monetary policy tightening expectations.

Whether the Fed’s emergency efforts are enough to restore confidence in the system will come down to whether banks can return to stability without causing a credit crunch large enough to drag down the US economy.

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Inside The Story

About Joe Palmisano

Joe Palmisano is Editorial Director for Connect Money, where he brings nearly three decades experience of market insights as a financial journalist, analyst and senior portfolio manager for leading financial publications, advisory firms, and hedge funds. In his role as Editorial Director, Joe is responsible for the selection of content and creation of daily business news covering the financial markets, including Alternative Assets, Direct Investment and Financial Advisory services. Before joining Connect Money, Joe was a financial journalist for the Wall Street Journal, regularly publishing feature stories and trend pieces on the foreign exchange, global fixed income and equity markets. Joe parlayed his experience as a financial journalist into roles as a Senior Research Analyst and Portfolio Manager, writing daily and weekly market analysis and managing a FX and US equity portfolio. Joe was also a contributing writer for industry magazines and publications, including SFO Magazine and the CMT Association. Joe earned a B.S.B.A. in Finance from The American University. He holds the Chartered Market Technician (CMT) designation and is a member of the CFA Institute.