If you were to go by the tone of JP Morgan’s earnings update last Friday, you might reasonably conclude that – whilst the future outlook for the US economy isn’t great – the banking crisis is over.
Despite Jamie Dimon’s assertion that “looking ahead [there’s] a little bit of a storm cloud, we’re going to be kind of cautious”, those looking to the large banks for signs of stress found little to chew on, with new account openings up and an influx of deposits from former account owners of regional banks.
But has this led to market calm, or market confusion? Today we’ll take a re-examination of the banking crisis situation and consider what story the hard data is telling us.
What’s happened to deposits?
At a broad aggregate level, the decline in US banks has been stark – the chart below of the year-on-year decline in dollar values shows that if not outright declining, deposits have been slowing since early 2021:
This picture is useful because it highlights a fact that the bank crisis narrative didn’t focus on: deposit outflows are not solely a confidence crisis, nor are they a recent phenomenon.
You had aggressive growth throughout 2020 as the pandemic forced saving over spending, coupled with stimulus checks for US citizens. Following this the growth declined due to stimulus payments ending, and then took another aggressive leg down throughout all last year as money market funds (easily accessible listed vehicles generally paying close to the Fed Funds Rate) boasted yields far in excess of traditional bank account rates.
So, whilst deposits are still declining on a YoY basis, this data alone is not solely due to a banking crisis – one for the ‘confusion’ camp.
Fed Emergency Lending
Of course, one of the aspects which helped initially calm the market was the implementation of the ‘Bank Term Funding Program’ (BTFP), which has been tapped in earnest by banks since its launch.
With only a few weeks of data since the program launched, it’s difficult to say if this shows that the crisis is easing, but a decline in usage is a good start to promoting market calm.
Similarly, bank usage of the Fed’s emergency lending window (which has been around since the 2000s), is declining after an aggressive rise in usage – this is a definite piece of data which suggests that the situation is improving, albeit nowhere near a normal level yet.
Source: FRED, Innova Asset Management
A proxy for liquidity in the US financial system shows that after a rapid increase in March, the level has stabilised and has begun to decline in recent weeks – once again, a case of the situation improving, but not back to levels before this issue began.
Finally, we can consider where different markets are pricing ‘calm versus confusion’, based on what we know reacted violently to the initial crisis panic.
Firstly, we can consider the MOVE index, a measure of volatility in the fixed income space which ran aggressively at the onset of the SVB bankruptcy.
After roofing to an exceptionally high ~200 level in early March, the MOVE index has returned to the levels seen prior to the panic. At least in the volatility space, the market has largely priced out the risk of a banking crisis, suggesting we are back to a state of relative ‘market calm’ compared to the initial emergence of this narrative.
What about Credit Default Swaps (CDS), given those garnered much of the news cycle in the wake of the Credit Suisse takeover and the attack on Deutsche Bank?:
A very similar picture, the market is pricing out the banking crisis premium from the pricing of 5-year Deutsche Bank CDS contracts and the price is slowly returning to levels prior to this period.
And to close out, we can consider the behaviour of US financial stocks, which were sold off aggressively going through this period.
Source: Bloomberg, Innova Asset Management
US regional banking stocks (seen here with the KBW Regional Banking Index) continue to decline, albeit at a less rapid rate than during March – major banks however have posted a solid recovery and are almost back to levels seen at the start of the year. We expect this will be a likely continuation of this narrative, where large banks recover at the expense of more vulnerable regional counterparts.
Are We Done Yet?
Despite the market news cycle often moving on from such events in a hurry, we think it is always worthwhile to consider what the data is telling us. The potential risks associated with US regional banks does not appear to be over, albeit conditions are improving.
Caution can cost an investor potential gains if it’s misplaced, but in an environment such as this caution can also avoid the risk of ruin from chasing trends and risk which may or may not be persistent. We prefer to keep our eyes on valuations and look at these risks as potential opportunities, in the event they are reasonably priced.