After SVB’s failure, New York regulators announced the closure of Signature Bank, a commercial bank with private client offices in New York, Connecticut, California, Nevada and North Carolina. As of Sept., almost a quarter of its deposits came from the cryptocurrency sector. The Federal Deposit Insurance Corporation (FDIC) took control of Signature, which had $110.36bn in assets and $88.59bn in deposits in 2022. Federal authorities extended the guarantee to all deposits at both SVB and Signature Bank, while the Fed announced a new facility: the Bank Term Funding Program (BTFP). It will offer loans of up to one year to banks pledging Treasuries, agency MBS/debt, and other qualifying securities. This collateral will be valued at par (meaning that all the mark-to-market losses will be ignored for the purposes of these loans). BTFP will be backed by $25bn from the Treasury. Fed said the facility is large enough to cover all uninsured deposits at US banks.
US banks funding
The Fed released the weekly data on the use of its lending facilities. In total, there was $164.8bn of borrowing between the Fed’s discount window ($152.85bn) and the Bank Term Funding Program ($11.9bn). The previous discount window high was $111bn during the 2008 financial crisis (then usage was as much as 1.8% of deposits compared to 1% now). Bank lending standards had already tightened. Small and medium sized banks (<$250bn in assets) play a large role in lending, especially in CRE (commercial real estate). They make up 80% of CRE loans, half of commercial and industrial loans, and 45% of consumer loans. CRE loan growth has been extremely strong, while business and consumer loan growth has started to weaken. Investors are trying to assess the liquidity mismatch on US banks’ balance sheet vs. the amount of uninsured deposits. In aggregate, US banks own $5.7trn of mortgages, $2.8trn of agency MBS (25% of total outstanding) and $1.4trn of US Treasuries (6% of total outstanding). These three fixed-rate categories of assets represent 57% of banks liquid liabilities (deposits). Total deposits amount to $17.5trn, of which 45% are uninsured. US money market funds (MMFs) assets have surged by $121bn over the week, as depositors move their money out of banks into MMFs. The largest share was from institutional investors ($101bn). MMFs took $163bn out of the Fed’s reverse repo facility. This fall was compensated by the rise in banking reserves through the $300bn increase in credit lines.
Core CPI accelerated in Feb., rising 0.5% m-o-m, vs. 0.4% expected. The y-o-y reading fell to 5.5% from 5.6%. Core services ex housing reaccelerated to 0.4% (5.2% annualized). Travel services inflation was strong with a large gain in both airfare and hotel prices. Recreation services inflation jumped by 1.2% m-o-m, the largest increase in three years. Housing inflation stays elevated with both rent and owners’ equivalent rent rising 0.7% m-o-m. The y-o-y growth rose further to 8.1%. Core goods inflation slowed to 0.0% m-o-m, entirely driven by a large -2.8% drop in used vehicle prices. Ex used vehicles, large household durable goods and apparel inflation remain strong despite elevated inventories relative to sales at retailers. Headline CPI slowed to 0.4% m-o-m and y-o-y fell to 6.0%. Energy prices fell and food inflation moderated.
The ECB delivered on its “intention” to raise policy rates by 50bps, bringing the deposit rate to 3.0%. The ECB did not commit to further rate hikes in Q2, noting that “the elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions”. The new reaction function notes that future decisions “will be determined by assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission”. The important bit is that financial and banking stress will be included as inputs into future decisions, with the ECB noting that its policy toolkit is “fully equipped to provide liquidity support to the euro area financial system if needed”. Investors do not expect additional hikes.
The focus will be the FOMC meeting on Wednesday, with other central banks issuing decisions too (Brazil on Wednesday and Taiwan, Switzerland, Norway, and the UK on Thursday). Investors are expecting a 25bps hike with a 62% probability taking the upper end of the range to 5%. The Dot Plot (forward guidance) will be updated. We have seen significant volatility in rates with the MOVE index rising to its highest level since the global financial crisis. The collapse of SVB heightened concerns that further interest rate hikes by the Fed could strain the financial industry. Interest rates have declined sharply, with the 2-year Treasury yield experiencing an unprecedented two-day movement closing the week at 3.84%, not seen since the market crash in 1987. This has prompted many hedge funds with extreme short positions in short-term US bond futures to hedge or exit their positions, amplifying the volatility in the bond market. The Fed is expected to reach a terminal rate of 4.9% in May and then to start cutting rates this summer to 4% by end 2023.