Evening Brief – 06.07.23
The Fed did not attempt to exploit the bank-failure channel of tighter monetary policy; thus, great efforts were made to compensate uninsured depositors and safeguard the banking system in the immediate aftermath of SVB’s failure.
Nevertheless, the bank-failure channel was activated; it is difficult to dispute with bankers who assert that liquidity issues, jittery depositors, and an underwhelming economic environment warrant a more cautious approach to lending.
Fortunately, the financial system has had time to respond, by taking on temporary borrowings, decreasing reliance on uninsured deposits, developing new programs to cushion unrealized losses, and simply allowing panic to subside.
The banking crisis has thus far remained a question of unrealized losses and interest rate movements rather than loan repayments and creditworthiness; actual defaults and loan charge-offs remain well below pre-pandemic averages even as they rise from 2021 lows. Furthermore, it is highly probable we are near the peak of the Fed’s hiking cycle.
It was nearly two months between the initial failure of Silicon Valley Bank and the failure of First Republic, and markets are currently pricing many smaller institutions as if they are only slightly better off than First Republic was immediately after SVB. It is important to keep in mind that there are still risks remaining in the banking system.
For the time being, things have not changed significantly; yet, if there is one thing that the year 2023 has taught us, it is that crises may develop rapidly.