Forget your wallet, what’s in your bank?

Stocks mostly declined yesterday as bank sector fears continued to overshadow the markets. Producer Price inflation dipped further giving hope that consumer inflation is on the mend.

Banking on hopes. Ok, so you read my headline. Go on, read it again… OK, ready? Yes, another “bank fears” day. How can that be, given that the President of the US, Joe Biden, has told us that the banking sector is healthy? Indeed, the President of Banking Coolness, Jamie Dimon, has also told us not to worry. Even further, the President of Interest Rate Hike Pain Delivery, Jerome Powell, has ALSO told us not to worry, that banking sector problems are behind us. If that triumvirate of power can’t calm our nerves, what can? I don’t know, maybe some real financial facts on the situation! Let’s dig in, shall we?

Do you remember why those now infamous regional banks failed over the past 2 months? Depositors got nervous and pulled their funds out so fast that banks were forced to sell underwater securities to fulfill deposit requests. There was more. A lot of those banks were struggling to make healthy margins in the current interest rate environment. Why? Because their borrowing costs have gone up faster than their loan receipts. Banks have weathered these issues before, and generally, they should not be cause for concern, but even healthy banks in healthy times would struggle to survive large bank runs. So, the large outflow of deposits was the straw that broke the camel’s back. So then, are we out of the woods as professed by those prescient banking influencers from the first paragraph? I will present 2 charts which should give you the answers you seek. Check them out then keep reading.

The first chart shows outstanding Fed loans to banks to cover reserve requirements. On it you can see that, for the most part, those are near zero, historically. When banks are operating normally, they are able to maintain necessary balances to cover withdrawals and reserve requirements. When cash starts to clear out their vaults, they have to go to the Fed to borrow money for liquidity. On the chart you can see 3 spikes since 2001. The first was The Global Financial Crisis… for obvious reasons. The second came at the start of the pandemic… also, for obvious reasons. But the third, which began in mid-March of this year… well, that was the bank run stuff combined with the prolonged inverted yield curve problem I mentioned above. I drew a red dash line to show you where the level is currently so you can see that the amount of emergency bank borrowing is still far above normal. Now look at the second chart, compliments of the smart folks at Bloomberg. The light-grey bars on the top represent the Fed Discount Window (the old way of borrowing from the Fed) and the Bank Term Funding Program (the new way of borrowing from the Fed initiated in March in response to the SVB failure). You can see how the grey bars spiked up in mid-March and stayed high through last week when they dipped a bit… progress. However, if you look closely, you can see that they rose again this week!

Earlier in the week, I wrote about concern over Commercial Real Estate loans held by many regional and community banks. Fortunately, as I related, not all of those potential problems will hit at the same time, but most of the problems will rear themselves within the next 4-5 years, based on a typical CRE loan term. While those have very little to do with reserves and deposits, the stress of non-performing or underwater loans could cause depositors with deposits over $250k to consider… um, other, safer options. This can only exacerbate the pre-existing condition. Unfortunately, folks, despite assurance from some very in-the-know folks, it is too early to tell if the regional banking crisis is over… or just beginning. This underscores the importance of careful research when considering an investment in not only a regional bank, or any company for that matter.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday on more banking fears, though tech was a shining light. The S&P500 slipped by -0.17%, the Dow Jones Industrial Average fell by -0.66%, the Nasdaq Composite Index advanced by +0.18%, and the Russell 2000 Index declined by -0.84%. Bonds gained in response to the positive PPI release and 10-year Treasury Note yields declined by -5 basis points to 3.38%. Crypts fell by -3.40% and Bitcoin declined by -3.11%.

WHAT’S NEXT

• University of Michigan Sentiment (May) may have declined to 63.0 from 63.5. Inflation Expectations in 1-Year may have declined to 4.4% from 4.6% (wink, wink… the Fed watches this, I covered it earlier this week in one of my notes).
• Fed speakers today: Daly, Jefferson, and James Bullard (who loves Fridays ).
• Next week: Still more earnings in addition to regional Fed Reports, Retail Sales, Industrial Production, Leading Economic Index, and housing numbers. Check in on Monday for weekly calendars and details.