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.