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Volatility, bank bailouts... it’s just like old times 

When is a bank bailout not a bank bailout? All depositors at SVB and Signature will be made whole, with FDIC fully backing all deposits. Depositors will have access to all of their money and no losses will be borne by the taxpayer, with costs associated retrieved via a bank levy. Stock and bondholders are not protected. It seems hopes for a white knight to buy the bank didn’t materialise and the Fed, FDIC and Treasury felt obliged to come in. HSBC has taken on the UK arm of SVB.  

Does this really constitute a bailout? 

Well, sort of – it certainly introduces some degree of moral hazard – don't worry about depositing at a risky bank paying top dollar’ll get made whole no matter what. It’s not a real bailout in terms of using cash to prop up a bank by buying out shareholders. But does such coordinated intervention signal that regulators are really worried about the US banking system? Would they step in if all were really well elsewhere? 

Easing back into it 

The Fed meanwhile is easing again - announcing a new "Bank Term Funding Program" that will offer "loans of up to one year" to "banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress". The Fed will also ease conditions at the discount window.  

The Fed blinks 

So, they blinked – faced with a bank failure in a pretty niche corner of the market and the powers the be just couldn’t help themselves from intervening. The bailout for depositors is pure moral hazard and the Fed is so scared it’s easing again and markets are starting to price in no rate hike on March 22nd, having bet on 50bps in the middle of last week before the bank failure. I don’t think this is necessarily true – the Fed will know that it’s inflation-busting credentials are now even more in focus after this 1yr QE programme. So, 25bps is on – just no need to go for 50bps.  

Inflation tomorrow is kind of key. The question for banks in the wider sense is not so much about balance sheets and contagion from this event but the cost of deposits and earnings.  

What really matters to the banks now 

Bank stocks fell again as sentiment towards the sector remains shaky, dragging the major European indices into the red. The FTSE 100 trades below 7,700 and is now almost 5% below its all-time high struck a month ago. Tech stocks rushed out messages this morning saying they are not exposed. Futures had been holding up ok, gapping higher at the open on Sunday evening, but we saw some aggressive selling when the cash equity market opened in London this morning. Dow futs trade about 200pts higher with the US 10yr yield back at 3.623%. 

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