US central bank and authorities react quickly
Even before the stock market opened yesterday, the US Federal Reserve and the US deposit insurance agency (FDIC) had taken action. The US authorities are now providing banks with additional liquidity under certain conditions, and deposit insurance for savings deposits was expanded as a precautionary move, in order to prevent customers from pulling out their money in a panic.
Extreme price movements
Despite these measures, equities in several US regional banks crashed, as investors are worried that the institutions may run into financial problems if large amounts of capital are pulled out. At the same time, short-dated US government bonds (two-year maturity) saw one of the sharpest price moves in their history. Rate hikes by the Fed that the market had still been recently expecting were priced out, while rate cuts were priced in for the second half of the year.
Questionable interest rate hikes
Apparently, many market participants now believe that the problems flaring up at some banks will prompt the Fed to take a less aggressive approach. The topic of inflation, which has dominated the bond markets for months, has been completely eclipsed in recent days. Similarly sharp yield moves were seen in the euro area as well. In Europe, banks’ equities and bonds also felt the heat, but to a far lesser degree than in the USA.
Raiffeisen funds not exposed to US bank failures
Raiffeisen KAG’s retail funds were not and are not invested in the US banks affected, neither in bonds nor in equities. Naturally, however, there are investments in larger, systemically-important banks and financial services providers, albeit generally at a below-average level (compared to the market as a whole). In the bond segment, the fund management was positioned for rising government bond prices with some of the strategies. Yesterday, the sharp rise in prices of government bonds in the USA and the euro area were used to realise profits on these positions.
Widening of the crisis currently unlikely
At the moment, the fund management does not see any widespread issues in the US banking system. It views the problems very much as individual cases and as problems at individual banks with their specific business models and risk management. With regard to Silicon Valley Bank in particular, it appears that there was egregious mismanagement of interest rate and liquidity risks, rather than a systemic problem that applies to the banking sector as a whole.
Of course, in principle, contagion to other banks is always possible if there is a “bank run”, i.e. a massive, widespread withdrawal of deposits. At the moment, however, there is no reason for this to occur. The high-profile announcements of measures to secure deposits should be sufficient to prevent any panicked reactions. It should also be stressed that the collapsed Silicon Valley Bank (SVB) mainly held corporate deposits and that only a small percentage of the deposits belonged to private customers. Experience has shown that the latter tend to pull out their money faster. Most US banks which were or are at the centre of speculation about liquidity shortfalls have significantly larger deposit bases in the retail business, compared to SVB. Another factor is the additional liquidity support by the Fed.
Higher interest rates for savers?
However, it is quite conceivable that many banks will now increase their interest rates on deposits in order to hold onto or attract customers’ funds, and will thus post slightly lower profits than recently expected. That said, these mild declines in earnings expectations stand in no relation to the price drops of 50% and more that have been suffered by some regional US banks in recent days.
Market reactions seem exaggerated
With regard to monetary policy in the USA and the euro area, the market reactions seen in recent days seem a bit overdone. So far, the US Federal Reserve has structured its support measures in a manner which allows it to assist the banks facing difficulties, without undermining its monetary policy. As long as the situation remains restricted to isolated bank failures, these events are likely to have relatively modest ramifications for US monetary policy. However, it is possible that the interest rate path going forward may be modified slightly by the recent events. This also applies with regard to the European Central Bank’s monetary policy. That said, at the moment no acute risks to banks can be identified in the euro area that would make central bank intervention or monetary policy responses necessary.