New York (CNN) Global banks just suffered their worst week since 2008. So what happens?
The fallout from this month’s banking turmoil — the surprise bank runs and collapse of Silicon Valley Bank and Signature Bank — has been widespread. Since then, the global banking system has been shaken.
More volatility is expected for the coming week. But that doesn’t mean this is a repeat of the global financial crisis 15 years ago. Daily deposits from customers are guaranteed, and regulators around the world say the banking system remains healthy.
Credit Suisse and First Republic: The other two banks wobbled but held steady throughout the week. The powerful megabank Credit Suisse announced last week that it needs up to $53.7 billion in support from the Swiss National Bank to stay afloat. Meanwhile, First Republic Bank received a $30 billion lifeline from some of the largest US banks on Thursday.
Still, those Lifelines might not be enough to keep them afloat. US-traded Credit Suisse shares fell nearly 7% and First Republic shares fell about 33% on Friday. Analysts at JPMorgan wrote this week that a Credit Suisse acquisition by UBS appears likely.
U.S. commercial bank profits have been under pressure from deteriorating asset quality, slowing loan growth and rising deposit rates, said Seema Shah, chief strategist at Global Asset Management.
But SVB and Signature Bank were unique in that a large portion of their deposits were largely from the struggling tech and crypto sectors. Those banks also held an unusually large portion of their customers’ deposits in Treasuries — which had fallen in value when the Fed started raising interest rates, he said.
First Republic doesn’t have the same problems as Silicon Valley Bank. Long-term government bonds accounted for 55% of SVB’s total assets and only 15% of First Republic’s assets.
“Ultimately, investors will have to decide whether these individual/individual crises add to growing concerns or mark the beginning of contagion,” Shah wrote in a note last week.
Another red flag: But these meltdowns may not be entirely out of the ordinary.
Before its collapse, SVB had become the largest borrower of the Federal Home Loan Bank of San Francisco. Fed staff have called the FHLB the “lender of last resort.” Silvergate Bank, another recently collapsed bank that largely backed the cryptocurrency sector, also borrowed heavily from the FHLB system, according to the Brookings Institution.
First Republic has also been a major borrower from the FHLB. The bank had about $14 billion worth of loans from them at the end of 2022, down from just $3.7 billion in 2021.
Another bank that has made significant FHLB loans in San Francisco is Western Alliance. The shares of the regional bank were also turbulent this week and ended on Friday with a decline of more than 15%.
That doesn’t mean banks that borrow money from the FHLB and participate in the Federal Reserve’s emergency bank lending program, which lent banks $12 billion this week, are in deep trouble.
“There is nothing wrong with using the tools of a lender of last resort to overheat the economy,” Bank of America economists Ethan Harris and Shruti Mishra wrote on Friday.
But it raises red flags. Borrowing from the Fed’s discounting window has risen sharply to $153 billion from $5 billion last Wednesday. It is the largest loan amount on record.
“The sharp increase in bank emergency lending since the Fed’s discounting window speaks to funding and liquidity pressures on banks as a result of declining depositor confidence following one bank closure and two bank failures,” Moody’s analysts wrote last week. said it was “in line with Moody’s negative outlook for the US banking system.”
Stay alert, but don’t panic: So what’s a worried investor or bank customer to do? Stay calm but alert, say analysts. “Going forward, investors will have to watch what happens in regional bank deposits and lending to consumers and businesses,” said Torsten Slok, chief economist at Apollo Global Management.
Meta’s face
Meta Platforms shareholders rejoiced last week after founder and CEO Mark Zuckerberg announced a long-awaited change in the company’s strategy and steps to strengthen its balance sheet.
The technology company said last Tuesday that it plans to cut another 10,000 jobs, marking its second massive round of layoffs in four months. Zuckerberg said in a letter to staff the same day that the company is shifting its focus from the metaverse to artificial intelligence.
These changes come after Facebook moved to Meta last year, marking its costly move into the virtual world. Shareholders reacted negatively to the company’s strategy, demanding it cut costs as the Federal Reserve raised interest rates, putting more pressure on markets and the economy. The share price correspondingly fell by around 70 percent in 2022.
What does Meta’s about-face mean? Analysts say these austerity measures and the move to artificial intelligence are what Wall Street has been waiting for all along.
Investors certainly seem satisfied. Meta’s stock rose almost 9% last week.
“The layoffs have been music to the ears of investors who have grown tired of Zuckerberg and Facebook spending like 1980s rock stars over the past few years,” said Dan Ives, senior equity research analyst at Wedbush Securities.
The company’s shift in focus to artificial intelligence has helped convince investors that Meta is focused on improving current performance rather than a metaverse that could take years to monetize.
In addition, the company is prioritizing AI as its competitors strengthen their own stakes in the space, suggesting Meta doesn’t want to fall behind other tech giants in the AI craze. Microsoft said in February that it uses the technology that drives ChatGPT in its Bing search engine. Google announced its own artificial intelligence product, Bard, a day earlier.
While some believe that Meta is out of the woods when it comes to its explosive issues, it likely has a tough road ahead of it when competing with the tech giants.
“There’s a game of thrones going on in technology around artificial intelligence,” Ives said. “They have clear growth challenges ahead of them.”
Next
Monday: Christine Lagarde, President of the European Central Bank (ECB), speaks; The weekly reserve balances of the Federal Reserve Banks are released.
Tuesday: US Existing Home Sales.
Wednesday: The FOMC announces its latest policy rate decision and economic forecast. Federal Reserve President Jerome Powell answers reporters’ questions.
Thursday: The Bank of England announces its latest key interest rate decision; US building permits, new home sales and first unemployment benefits.
Friday: US core durable good orders and PMI.