New York (CNN) Global banks just suffered their worst week since 2008. So what’s next?
The fallout from this month’s banking turmoil — the surprising bank runs and collapses of Silicon Valley Bank and Signature Bank — has been widespread. In its wake, the global banking system has been shaken.
Credit Suisse and First Republic: Two other banks faltered but held steady throughout the week. Beleaguered megabank Credit Suisse announced last week that it will need up to $53.7 billion in support from the Swiss central bank to stay afloat. Meanwhile, First Republic Bank received a $30 billion bailout Thursday from some of the largest banks in the United States.
However, those lifelines may not be enough to keep them afloat. Credit Suisse’s U.S.-traded shares fell nearly 7% and First Republic shares fell about 33% on Friday. JPMorgan analysts wrote this week that a UBS takeover of Credit Suisse looks likely.
US commercial bank earnings have been under pressure from deteriorating asset quality, slowing loan growth and rising deposit rates, said Seema Shah, chief global strategist at Principal Asset Management.
But SVB and Signature Bank were unique in that most of their deposit bases were primarily 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 after the Fed began raising interest rates, she said.
First Republic doesn’t have the same problems that Silicon Valley Bank had. Long-term treasury bonds accounted for 55% of all assets of SVB and only 15% of First Republic.
“Ultimately, investors must decide whether these individual/idiosyncratic crises add to growing concerns, or mark the beginning of the contagion,” Shah wrote in a note last week.
Another red flag: But these mergers may not be entirely idiosyncratic.
Before its collapse, SVB had become the largest borrower of the Federal Home Loan Bank of San Francisco. The FHLB has been called a “lender of 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 in loans from them at 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. Shares in the regional bank were also troubled this week and ended Friday down more than 15%.
That’s not to say that banks that receive money from the FHLB and participate in the Federal Reserve Bank’s emergency term 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 overheated 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. This is the largest amount of borrowing in history.
“The sharp rise in emergency bank borrowing since the Fed’s discount window speaks to funding and liquidity strains at banks, fueled by weakening depositor confidence after one bank closure and two bank failures,” Moody’s analysts wrote last week. passed. The data, they said, is “consistent with Moody’s negative outlook for the US banking system.”
Stay alert, but don’t panic: So what’s a concerned investor, or bank customer, to do? Stay calm but vigilant, analysts say. “Looking ahead, investors will need to monitor what’s happening in regional banks with deposits and lending to consumers and lending to corporations,” 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 measures to grow its balance sheet.
The tech behemoth said last Tuesday that it plans to cut an additional 10,000 workers, marking the second round of massive layoffs in four months. Zuckerberg said in a letter to staff the same day that the company is shifting its focus away from the metaverse to artificial intelligence.
These changes come after Facebook rebranded to Meta last year to signify its costly move into the virtual world. Shareholders reacted negatively to the company’s strategy and demanded that it cut costs as the Federal Reserve raised interest rates, increasing pressure on markets and the economy. Therefore, shares of the stock fell by about 70% in 2022.
So what does Meta’s face mean? Analysts say these cost-cutting measures and the shift to AI are what Wall Street has been waiting for all along.
Investors certainly seem pleased. Meta shares rose nearly 9% last week.
“The downloads have been music to the ears of investors who are sick and tired of Zuckerberg and Facebook spending money like a 1980s rock star for the past few years,” said Dan Ives, senior equity research analyst at Wedbush Securities.
The company’s shift in focus to AI has helped convince investors that Meta is focusing on improving current performance rather than the metaverse, which could take years to monetize.
Moreover, the company’s prioritization of AI comes as its competitors strengthen their 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 was using the technology that powered ChatGPT for its search engine, Bing. Google announced its own AI product, Bard, a day ago.
While some believe the Meta is out of the woods when it comes to its major challenges, it likely has a tough road ahead when it comes to competing with its fellow tech giants.
“There’s a game of thrones going on in technology around AI,” Ives said. “They have clear growth challenges ahead.”
The next one
Monday: The President of the European Central Bank (ECB) Christine Lagarde speaks; Weekly reserve balances with Federal Reserve Banks are released.
Tuesday: Existing US Home Sales.
Wednesday: The FOMC publishes its latest rate policy decision and economic forecasts. Federal Reserve Chairman Jerome Powell answers questions from reporters.
Thursday: Bank of England publishes its latest policy rate decision; US building permits, new home sales and initial jobless claims.
Friday: Good steady US orders and PMI.
