A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can register right here. You can listen to an audio version of the newsletter by clicking on the same link.
Global banks just suffered their worst week since 2008. What’s next?
The fallout from this month’s banking turmoil — the surprise bank runs and collapses of Silicon Valley Bank and Signature Bank — has been widespread. In its wake, the global banking system has been shaken.
More volatility is expected in the coming week. But that does not mean that this is a repeat of the global financial crisis from 15 years ago. Daily customer deposits are guaranteed and regulators around the globe say the banking system remains healthy.
Credit Suisse and First Republic: Two more banks faltered but remained upright throughout the week. Beleaguered megabank Credit Suisse announced last week that it will take up to $53.7 billion in support from the Swiss central bank to stay afloat. Meanwhile, First Republic bank on Thursday received a $30 billion lifeline from some of the biggest banks in the United States.
Still, these lifelines may not be enough to keep them afloat. U.S.-traded shares of Credit Suisse fell nearly 7% and First Republic shares fell about 33% on Friday. JPMorgan analysts wrote this week that a UBS takeover of Credit Suisse seems likely.
U.S. commercial bank profits have been under pressure due to deteriorating asset quality, slowing loan growth and rising deposit rates, said Seema Shah, global chief strategist at Principal Asset Management.
But SVB and Signature Bank were unique in that much of their deposit bases were largely from the struggling tech and crypto sectors. Those banks also held an unusually large portion of their customers’ deposits in government bonds — which had fallen in value when the Fed started raising interest rates, she said.
First Republic doesn’t have the same problems that Silicon Valley Bank did. Long-term government bonds made up 55% of all SVB assets and only 15% of First Republic’s.
“Ultimately, investors need to decide whether these individual/idiosyncratic crises add to growing concerns or mark the start of contagion,” Shah wrote in a note last week.
Another red flag: But these meltdowns may not be entirely idiosyncratic.
Before its collapse, SVB had become the largest borrower in the Federal Home Loan Bank of San Francisco. The FHLB has been called a “lender of second last resort” by Fed staff. Silvergate Bank, another recently collapsed bank that largely supported 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 by the end of 2022, up from just $3.7 billion in 2021.
Another bank that has made significant FHLB loans in San Francisco is Western Alliance. Regionsbank’s shares were also tumultuous this week, ending Friday down more than 15%.
That doesn’t mean banks that take money from the FHLB and participate in the Federal Reserve’s emergency lending program, which lent $12 billion to banks this week, are in big trouble.
“There is nothing wrong with using lender of last resort tools to deal with an overheating economy,” Bank of America economists Ethan Harris and Shruti Mishra wrote on Friday.
But it raises red flags. There has been a sharp increase in borrowing from the Fed’s discount window to $153 billion from $5 billion just last Wednesday. It is the largest loan amount ever.
“The sharp increase in bank distress loans from the Fed’s discount window speaks to the funding and liquidity strain on banks, driven by weakening depositor confidence following a bank resolution and two bank failures,” Moody’s analysts wrote last week. The data, they said, is “consistent with Moody’s negative outlook for the US banking system.”
Be alert, but don’t panic: So what’s a concerned investor or bank customer to do? Stay calm but vigilant, say analysts. “Looking ahead, investors will need to monitor what’s going on in regional banks with deposits and lending to consumers and lending to businesses,” said Torsten Slok, chief economist at Apollo Global Management.
Meta Platform’s shareholders rejoiced last week after founder and CEO Mark Zuckerberg announced a long-awaited shift in the company’s strategy and measures to boost its balance sheet.
The technologist 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 turning its focus away from the metaverse to artificial intelligence.
These changes come after Facebook rebranded as Meta last year to mark its expensive shift into the virtual world. Shareholders reacted negatively to the company’s strategy, demanding that it lower costs as the Federal Reserve raised interest rates, adding pressure to markets and the economy. Shares of the stock therefore fell by around 70% in 2022.
So what does Meta’s about-face mean? Analysts say these cost-cutting measures and the shift to artificial intelligence are what Wall Street has been waiting for all along.
The investors certainly seem satisfied. Meta’s shares rose nearly 9% last week.
“The layoffs have been music to the ears of investors who have grown weary of Zuckerberg and Facebook spending money like a 1980s rock star over the past few years,” said Dan Ives, senior equity analyst at Wedbush Securities.
The company’s shift in focus on AI has helped convince investors that Meta is focused on improving current performance rather than the metaverse, which could take years to monetize.
What’s more, the company’s prioritization of AI comes as its competitors bolster their own stakes in the space, suggesting that Meta doesn’t want to be left behind other tech giants in the AI craze. Microsoft said in February that it was using the technology powering ChatGPT for its search engine, Bing. Google announced its own AI product, Bard, a day earlier.
While some believe the Meta is out of the woods when it comes to its rampant issues, it will likely have a tough road ahead when it comes to competing with its tech giants.
“There’s a game of thrones going on in technology around AI,” Ives said. “They have clear growth challenges ahead.”
Monday: European Central Bank (ECB) President Christine Lagarde speaks; Weekly reserve balances at the Federal Reserve Banks are released.
Tuesday: sale of existing homes in the United States.
Wednesday: The FOMC publishes its latest interest rate decision and economic projections. Federal Reserve President Jerome Powell answers questions from reporters.
Thursday: Bank of England publishes its latest interest rate decision; US building permits, new home sales and first unemployment claims.
Friday: US core durable good orders and PMI.