Bloomberg Market Specialist Laura Liu, Leo Li (Es), Zane Van Dusen and Li Zhao contributed to this article. The original version appeared first on the Bloomberg Terminal.
Background
There’s a growing divide between big and small U.S. lenders as investors reprice credit risk and avoid trading in murkier corners of the market.
U.S. regional banks have seen the biggest increases in the market-implied probability of default (MIPD) based on Bloomberg Valuation (BVAL) bond pricing data. That contrasts with major U.S. banks, including JPMorgan Chase & Co., whose pricing and liquidity indicators remain stable. During the first quarter, the company recorded an unexpected surge in deposits as customers sought a haven. Chief Information Officer Lori Beer said the bank successfully expanded its market share in retail deposits by about 60 basis points over the past year.
Big U.S. banks are escaping the turmoil observed in the equities and credit default swap markets. However, leading voices including the European Central Bank’s top oversight official, Andrea Enria, are urging global financial regulators to examine credit default swaps in light of recent banking disturbances.
The issue
Investors may remain jittery about the banking sector after Treasury Secretary Janet Yellen in March said regulators aren’t looking to provide unilateral “blanket” deposit insurance. Federal Reserve Chair Jerome Powell made clear that inflation remains policymakers’ top concern. Meanwhile, smaller regional banks are receiving extra scrutiny.
The MIPD function seeks to distill market sentiment into a responsive issuer-level and sector-level creditworthiness indicator that reacts to changing market conditions, especially in times of stress. It’s modeled through yield curve spreads over risk-free curves, combined with cash flow and recovery rates data and enriched by proxy methods when BVAL curves aren’t available. BVAL data combines market insight, quantitative models and contributions from over 4,000 sources to produce defendable valuations.
First Republic Bank collapsed with MIPD at 36.6%. Synchrony Financial, Credit Suisse and Zions Bancorp NA are among members with relatively high indicated credit risks. When looking at company-level analysis, the five-year probability of default for First Republic is at 37.8%. This is higher than the 33.6% for the U.S. banking sector overall, while JPMorgan is at 9.4%.
Credit default swaps at major U.S. banks have jumped to a range of 90-110 basis points, from 70-90 in early March. But they’re still low compared with 2008, when Morgan Stanley’s risk topped 1,300.
Tracking
Use Bloomberg’s WSL, MIPD, LQA and GCDS functions to analyze the credit market. Run BHL for more functions training resources.
For more information on this or other functionality on the Bloomberg Professional Service, click here to request a demo with a Bloomberg sales representative. Existing clients can press <HELP HELP> on their Bloomberg keyboard.
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