A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
Global banks just suffered their worst week since 2008. So what comes 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.
More volatility is in store for the week ahead. But that doesn’t mean this is a repeat of the global financial crisis from 15 years ago. Everyday customers’ deposits are guaranteed and regulators across the globe say the banking system remains healthy.
Credit Suisse and First Republic: Two more banks wobbled but remained upright through the week. Beleaguered megabank Credit Suisse announced last week that it will take up to $53.7 billion in support offered by the Swiss central bank to stay afloat. Meanwhile, First Republic bank received a $30 billion lifeline on Thursday from some of the largest banks in the United States.
Still, those lifelines might not be enough to keep them afloat. US-traded shares of Credit Suisse were down nearly 7% and First Republic shares plunged by about 33% on Friday. JPMorgan analysts wrote this week that a UBS takeover of Credit Suisse seems likely.
US commercial banks’ profits 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 much of their deposit bases were largely from the struggling tech and crypto sectors. These banks also held an unusually large proportion of their customer’s deposits in Treasuries — which had dropped in value as the Fed started hiking interest rates, she said.
First Republic doesn’t have the same problems Silicon Valley Bank did. Long-term treasury bonds made up 55% of all SVB assets and just 15% of First Republic’s.
“Ultimately, investors need to decide if these individual/idiosyncratic crises add up to growing concerns, or mark the start of crisis contagion,” Shah wrote in a note last week.
Another red flag: But these meltdowns may not be totally idiosyncratic.
Before its collapse, SVB had become the largest borrower of the Federal Home Loan Bank in San Francisco. The FHLB has been called a “lender of next-to-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 large borrower from the FHLB. The bank had about $14 billion worth of loans from them at the end of 2022, up from just $3.7 billion in 2021.
Another bank that has taken out significant FHLB loans in San Francisco is Western Alliance. Shares of the regional bank were also tumultuous this week, and ended Friday down more than 15%.
That doesn’t mean that banks taking money from the FHLB and participating in the Federal Reserve’s emergency Bank Term Lending Program, which lent out $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,” wrote Bank of America economists Ethan Harris and Shruti Mishra on Friday.
But it does raise 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. That’s the largest amount of borrowing on record.
“The sharp increase in banks’ emergency borrowing from the Fed’s discount window speaks to the funding and liquidity strains on banks, driven by weakening depositor confidence following one bank winddown and two bank failures,” wrote Moody’s analysts last week. The data, they said, is “in line with Moody’s negative outlook on the US banking system.”
Stay vigilant, but don’t panic: So what’s a worried investor, or bank customer, to do? Stay calm, but vigilant, say analysts. “Looking ahead, investors will need to monitor what is going on in regional banks with deposits and lending to consumers and lending to corporates,” said Torsten Slok, chief economist at Apollo Global Management.
Meta Platforms 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 tech behemoth said last Tuesday that it plans to cut an additional 10,000 workers, marking its second massive round of layoffs in four months. Zuckerberg said in a letter to staff that same day that the company is pivoting its focus away from the metaverse to artificial intelligence.
These changes come after Facebook rebranded to Meta last year to signify its costly shift to the virtual world. Shareholders reacted negatively to the company’s strategy and demanded that it slash costs as the Federal Reserve ramped up interest rates, increasing pressure on the markets and economy. Shares of the stock accordingly plunged about 70% in 2022.
So, what does Meta’s about-face mean? Analysts say that these cost-cutting measures and shift to AI are what Wall Street has been waiting for all along.
Investors certainly seem pleased. Shares of Meta rose nearly 9% last week.
“The layoffs have been music to the ears of investors that have been sick and tired of Zuckerberg and Facebook spending money like a 1980s rockstar for the last few years,” said Dan Ives, senior equity research analyst at Wedbush Securities.
The company’s shift in focus on AI has helped convince investors that Meta is focusing on improving current performance instead of the metaverse, which could take years to monetize.
Moreover, the company’s prioritization of AI comes as its competitors solidify their own stakes in the space, suggesting that Meta doesn’t want to be left trailing behind other tech giants in the AI craze. Microsoft said in February that it was using the tech driving ChatGPT for its search engine, Bing. Google announced its own AI product, Bard, a day earlier.
While some believe that Meta’s out of the woods when it comes to its splurging woes, it will likely have a tough path ahead when it comes to competing with its tech giant peers.
“There’s a game of thrones going on in tech around AI,” Ives said. “They have clear growth challenges ahead.”
Monday: European Central Bank (ECB) President Christine Lagarde speaks; Weekly reserve balances with Federal Reserve Banks are released.
Tuesday: US existing home sales.
Wednesday: The FOMC releases its latest policy rate decision and economic projections. Federal Reserve President Jerome Powell answers questions from reporters.
Thursday: The Bank of England releases its latest policy rate decision; US building permits, new home sales and initial jobless claims.
Friday: US core durable good orders and PMI.