MacroResearchBoard

U.S. Banks: Another 2008? – March 13, 2023

A just-published report examined three topical issues affecting U.S. bank shares, including the hot issue of the week regarding deposit risks, which have triggered fears that banks might have to sell assets. The failure of Silicon Valley Bank sent chilling memories of the Global Financial Crisis for many investors and prompted swift actions by the U.S. Treasury which guaranteed protection of all deposits at any failed bank.

The report addressed three key questions: the impact of tightening lending standards; unrealized losses on securities portfolios; and exposure to commercial real estate (CRE). We concluded:

• Tightening lending standards are a sign that U.S. banks have begun to tap on the lending brakes. However, banks are unlikely to significantly restrict the provision of credit given their strong capital positions and the still solid debt-servicing capacities of businesses and households.
• Most banks have very liquid balance sheets with stable and diversified funding sources, implying that they will not need to sell their holdings of securities for funding purposes. As a result, the large unrealized losses on the bonds held by banks do not threaten a liquidity crunch in the U.S. banking system.
• Financial system anxieties are somewhat premature based on the conclusions of our research, fractional-reserve banking systems are reliant on faith of depositors and investors, making it paramount that the authorities act rapidly to provide a backstop whenever this faith is compromised to avoid escalating contagion. The U.S. Treasury which guaranteed protection of all deposits at any failed bank and the newly created Bank Term Funding Program (BTFP) will value U.S. Treasuries, agency debt and mortgage-backed securities at par. We expect these steps should go a long way to restore calm in financial markets in the days ahead.
• We remain overweight U.S. banks stocks, but favor large over smaller regional banks given the former’s lower concentration in CRE loans.