Have we avoided a banking crisis? (23Apr2023)

Personally, I think that the banking crisis is yet to be over and there are also concerning signs in the market about the macro conditions & US economy.

One of the signs of concern is the increasing debts. Household debt record, more repossession of vehicles, more credit card debt. Unfortunately, I do not think that the banking crisis is over and we should expect collateral damages coming soon.

The earnings of the non-Big 4 banks (Citi, JPM, BoA & WFC) should attract more deposits at the expense of the smaller/regional banks. As per the screenshot above, the smaller/regional banks play an important role in the Commercial Real Estate (CRE) ecosystem. Should they go under, CRE is likely to be affected. Eventually, the market may be left with the Big 4 banks.

SVB

Banks like SVB have been serving the startup sector for 40 years, surviving a few market crashes along the way. This has given them experience in the startup sector, allowing them to offer more attractive financing support - something that the Big 4 may lack. This may render less credit accessible for some businesses. For the Big 4, they may offer credit lines at higher interest rates, pending how they assess the risks of these sectors.

Macro

In macro, most economists look at inflation, GDP & unemployment. I extend my considerations to debts. As price is the result of demand meeting supply, the price is the relationship between the 2. If the banking sector collapses, the entire economy collapses.

When will the banking crisis is over? I doubt that any can offer a timeframe or extent. The banks' NIM is under because of the rapid increase in interest rates. The older bonds/treasuries bought suffered more "paper loss" as new ones with higher interest rates became available following the later Fed rate hike. After SVB saga, there was another rate hike of 25 bps. This implies that most banks holding these older bonds/treasuries will have incurred more "unrealized" losses. If the banks intend to hold these to maturity, there is no issue but if there is a bank run, these may be sold to fund the withdrawal. (Banks in the US are required to hold 10% deposits in cash). The smaller banks are less likely to survive such bank runs. When SVB was forced to sell $21B of their holdings in bonds and treasuries, they ended up incurring a loss of $1.9B ~ about a 10% loss in value.

Government Intervention

Once intervention takes place, it is no longer a “free market”. Does this look socialist or communist?

Neither Yellen & Powell have provided a no firm answer on the guarantee of the deposits. BUT this empowered the fund managers to attempt more risky investments as the government is likely to bail them out.

Whatever it is, the government should set the infrastructure, policies & rules. The government is not in a position to save every failing business ~ this is not the way for a capitalist free market. The Government should not set precedents that they cannot fulfil in the future.

The earnings from the smaller banks would reveal a better picture of the banking situation. For now, it is prudent to be watchful as we enter a critical time of the earnings season.