Macro Insights: Banking sector dominos are falling Macro Insights: Banking sector dominos are falling Macro Insights: Banking sector dominos are falling

Macro Insights: Banking sector dominos are falling

Macro 5 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  Regional bank concerns were reignited in the US yesterday with no clear trigger on the timing as structural challenges still in focus and regulatory hand proving to provide only a short-term relief. Risks of further bank runs as well as exposure to commercial real estate continues to highlight the vulnerability of the baking sector and suggests further tightening of lending standards may be coming.


US regional banks face threat of more bank runs

The reigniting of US regional bank concerns may be a surprise on the timing, but not on the trend. The relief from the bailout of First Republic was short-lived and lack of a bid in the regional bank stocks following the deal with JP Morgan possibly emboldened the short sellers. Structural challenges in the banking sector remain a key concern, including a high proportion of held-to-maturity securities in the portfolio (which may be sitting on large losses now) as well as the large proportion of uninsured deposits. Uninsured deposits are ones that exceed the $250,000 limit insured by the Federal Deposit Insurance Corporation (FDIC). Meanwhile, increased FDIC insurance costs are further adding to the problem.

Key problem arises when a sufficient number of depositors lose confidence in their banks and start to withdraw funds. These actions of withdrawing funds can turn into a self-fulfilling prophecy and exacerbate a bank run. Ultimately, the survival of banks is determined not by their fundamental strength, but by the perceived safety among the masses who entrust them with their funds.

As banks seek to bolster their deposits, they face heightened competition for cash. Rising interest rates are making bonds, money market funds and other investments a more lucrative place for individuals and businesses to store their money. Meanwhile, banks also face a risk of impending regulatory overhaul.

Looming commercial real estate issues

The exposure to commercial real estate is one of the other worries that is keeping bank stocks under pressure, and can highlight which other banks may be at risk. Recently, Charlie Munger, Berkshire Hathaway vice-chair, has warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall. The office segment is a particular source of risk, given the increasing remote and hybrid working options. Rising borrowing costs are also squeezing property owners, complicating the financing for many buildings. If these developers default on their debt, that could be a big blow to the US lenders exposed, and will have a more direct and quick ripple effect on the credit extension by the banks to the economy.

European bank lending survey flashing warning signs

The ECB’s Q1 2023 bank lending survey was also released yesterday, and highlighted that credit standards of Euro-area banks for loans or credit lines to enterprises tightened further substantially in the quarter and the pace of net tightening in credit standards remained at the highest level since the euro area sovereign debt crisis in 2011. Banks also reported a further substantial net tightening of credit standards for housing loans in Q1 2023. Slower lending was not just a factor of supply, but also weak demand. Firms’ net demand for loans fell strongly in the Q1 2023 due to high interest rates. While inflation, particularly from the services side, still remains strong, economic spillover concerns from the recent tightening seem to be increasing.

Source: ECB

Liquidity outlook is worsening

Recent gains in the market have been somewhat driven by a sudden boost in liquidity, with central banks injecting about $1tn including the Fed’s response to Silicon Valley Bank crisis with new liquidity facility as well as Bank of Japan’s purchases of Japanese government bonds and ECB’s slow-moving QT execution. The US treasury drawing down its account at the Fed to the tune of $500 billion since late January – a source of liquidity that has now run dry as that account has dropped to sub-$100 billion levels. From here, there are risks of a pullback in liquidity as debt ceiling concerns rise and ECB ramps up quantitative tightening. A change in policy from the BOJ is also still likely. Some easing from China’s central bank may offset, but it will likely remain small and targeted.

Economic fallout risks

Regional banks in the US could continue to face deposit outflows. The below chart shows the sequential drop in deposits reported in the Q1 earnings. Even though risk of a systemic crisis is still low, keep a watch on which other regional banks could continue to face a threat of bank-runs.

Tighter lending standards also remain likely as banks turn more conservative in their business activities in the months ahead and try to retail capital. The Fed has already reported that commercial lending activity decreased sharply in the last two weeks of March, especially at smaller banks. The ECB has also hinted at the same. More widespread caution from banks can dampen business activity and increase the likelihood of recession. This would especially expose companies that are more dependent on funding.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.