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Tag: Commercial Banking

  • JPMorgan Chase, Delta, Inflation Data, the Fed, and More to Watch This Week

    JPMorgan Chase, Delta, Inflation Data, the Fed, and More to Watch This Week

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    First-quarter earnings season kicks off this week. Results from big U.S. banks later in the week will be heavily scrutinized for the impact of the past month’s turmoil in the sector. Economic-data highlights will include the latest inflation data and minutes from the Federal Open Market Committee’s late-March meeting.



    Albertsons


    and


    CarMax


    will report on Tuesday, followed by


    Delta Air Lines


    and


    Fastenal


    on Thursday. Things pick up on Friday:


    Citigroup



    JPMorgan Chase



    Wells Fargo



    BlackRock


    and


    UnitedHealth Group


    are all scheduled to release their first-quarter results.

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  • First Republic Suspends Dividends on Preferred Stock

    First Republic Suspends Dividends on Preferred Stock

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    First Republic Suspends Dividends on Preferred Stock

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  • Credit Suisse chairman apologizes at final shareholder meeting in 167-year history

    Credit Suisse chairman apologizes at final shareholder meeting in 167-year history

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    “We wanted to put all our energy and our efforts into turning the situation around and putting the bank back on track. It pains me that we didn’t have the time to do so, and that in that fateful week in March our plans were disrupted. For that I am truly sorry. I apologize that we were no longer able to stem the loss of trust that had accumulated over the years, and for disappointing you.

    That’s Axel Lehmann, the chairman of Credit Suisse, addressing shareholders after the deal to be purchased at a cut-rate price by UBS, ending 167 years of independence. Shareholders at neither Credit Suisse
    CSGN,
    +1.39%
    nor UBS
    UBSG,
    +1.20%
    will get a chance to vote on the deal.

    Credit Suisse shares were trading at 0.81 francs, just below the 0.84 franc per share offer the UBS bid is now worth. A year ago, Credit Suisse was worth more than 7 francs per share.

    Lehmann, as noted in his speech, was not at the bank for its many scandals and trading debacles, most notably but hardly limited to the losses from the blowup of the Archegos family office and the freezing of funds tied to Greensill.

    “The period from October to March was not long enough. One legacy issue after another had already seen trust eroded – and with it, patience dwindled. At that, we failed. It was too late. The bitter reality is that there wasn’t enough time for our strategy to bear fruit,” said Lehmann.

    He said the deal “had to go through,” or the bank would have to restructure under Swiss banking law. “This would have led to the worst scenario, namely a total loss for shareholders, unpredictable risks for clients, severe consequences for the economy and the global financial markets,” he said.

    CEO Ulrich Körner made a similar apology. “We ran out of time. This fills me with sorrow. What has happened over the past few weeks will continue to affect me personally and many others for a long time to come,” he said.

    He specifically tied the collapse of SVB Financial and Signature Bank to its own demise.

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  • U.S. stocks have barely budged since last summer. Where will they go next?

    U.S. stocks have barely budged since last summer. Where will they go next?

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    U.S. stocks have shrugged off a number of threats since the start of the year, powering through the worst U.S. bank failures since the 2008 financial crisis, while resisting the pull of rising short-term Treasury yields.

    This helped all three main U.S. equity benchmarks finish the first quarter in the green on Friday, but that doesn’t change the fact that the S&P 500 index, the main U.S. equity benchmark, has barely budged since last summer.

    “The market has handled a lot of gut punches recently and it’s still standing in this range,” said JJ Kinahan, CEO of IG North America, owner of brokerage firm Tastytrade. “I think that’s a sign that the market is very healthy.”

    The S&P 500 index
    SPX,
    +1.44%
    traded at 4,110.41 on Sept. 12, 2022, according to FactSet data, just before aggressive Federal Reserve commentary on interest rates and worrisome inflation data triggered a sharp selloff. By comparison, the index finished Friday’s session at 4,109.31.

    Some equity analysts expect it to take months, or perhaps even longer, for U.S. stocks to break out of this range. Where they might go next also is anyone’s guess.

    Investors likely won’t know until some of the uncertainty that has been plaguing the market over the past year clears up.

    At the top of the market’s wish list is more information about how the Fed’s interest rate hikes are impacting the economy. This will be crucial in determining whether the central bank might need to keep raising interest rates in 2024, several analysts told MarketWatch.

    Stocks are volatile, but stuck in a circle

    The S&P 500 has vacillated in a roughly 600-point range since September, but at the same time, the number of outsize swings from day-to-day has become even more pronounced, making it more difficult to ascertain the health of the market, analysts said.

    The S&P 500 rose or fell by 1% or more in 29 trading sessions in the first quarter, including Friday, when the S&P 500 closed 1.4% higher on the last session of the month and quarter, according to Dow Jones Market Data.

    That’s nearly double the quarterly average of just 14.9 days going back to 1928, according to Dow Jones Market Data. The S&P 500 was created in 1957, and performance data taken from before then is based on a historical reconstruction of the index’s performance.

    Stocks also look almost placid in comparison with other assets. For example, Treasurys saw an explosion of volatility in the wake of the collapse of Silicon Valley Bank in March. The 2-year Treasury yield
    TMUBMUSD02Y,
    4.114%
    logged its largest monthly decline in 15 years in March as a result.

    “You can’t find any clues about where we’re going by watching the S&P 500,” said John Kosar, chief market strategist at Asbury Research, in a phone interview with MarketWatch. “Ten years ago, you could look at the movement of the S&P 500 and a simple indicator like volume and get a back-of-the-envelope idea of how healthy the market is. But you can’t do that anymore because of all this intraday volatility.”

    See: Stock-option traders are creating explosive volatility in the market. Here’s what that means for your portfolio.

    The S&P 500’s 7% advance in the first quarter of this year has helped to mask weakness underneath the surface. Specifically, only 33% of S&P 500 companies’ shares have managed to outperform the index since the start of the quarter, well below the long-term average, according to figures provided to MarketWatch by analysts at UBS Group UBS.

    Mega stocks, Fed to the rescue?

    If it weren’t for a flight-to-safety rally in large capitalization technology names like Apple Inc.
    AAPL,
    +1.56%    ,
    Microsoft Corp.
    MSFT,
    +1.50%
    and Nvidia Corp.
    NVDA,
    +1.44%    ,
    the S&P 500 and Nasdaq would likely be in much worse shape.

    Advancing megacap tech stocks have helped the Invesco QQQ
    QQQ,
    +1.66%
    Trust exchange-traded fund, which tracks the Nasdaq 100, enter a fresh bull market in the past week, as the closely watched market gauge closed more than 20% above its 52-week closing low from late December, according to FactSet data. That’s helped to offset weakness in cyclical sectors like financials and real estate.

    Tech behemoths have also benefited from the hype around artificial intelligence platforms like OpenAI’s ChatGPT.

    Confusion about the Fed’s quantitative tightening efforts to reduce the size of its balance sheet also helped muddle the outlook for markets.

    For example, the size of the Fed’s balance sheet has increased again in recent weeks as banks have tapped the central bank’s emergency lending programs in the wake of the failure of two regional banks, undoing some of the central bank’s efforts to shrink its balance sheet by allowing some of its Treasury and mortgage-backed bond holdings to mature without reinvesting the proceeds.

    Some analysts said this is akin to sending the market mixed signals.

    “It seems to be both tightening and loosening right now,” said Andrew Adams, an analyst with Saut Strategy, in a recent note to clients.

    What it takes for a break out

    U.S. stocks have remained rangebound for long stretches in the past.

    Beginning in late 2014, the S&P 500 traded in a tight range for roughly two years. Between Jan. 1, 2015 and Nov. 9, 2016, the day after former President Donald Trump defeated Hillary Clinton to become president of the U.S., the S&P 500 gained less than 100 points, according to FactSet data.

    At the time, equity analysts blamed signs of softening economic activity in China and weakness in the U.S. energy industry for the market’s lackluster performance.

    But after once it became clear that Trump would win the White House, stocks embarked on a steady ascent as investors bet that the Republican economic agenda, which included corporate tax cuts and deregulation, would likely bolster corporate profits.

    It wasn’t until the fourth quarter of 2018 that stocks turned volatile once again as the S&P 500 wiped out its gains from earlier in the year, before ultimately finishing 2018 with a 6.2% drop for the year, according to FactSet.

    As investors brace for a flood of first-quarter corporate earnings in the coming weeks, Kinahan said he expects stocks could remain range bound for at least a few more months.

    “There’s going to be a very cautious outlook still, which should keep us in this range,” he said.

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  • Dow rises more than 300 points after inflation report as Nasdaq heads for best quarter since 2020

    Dow rises more than 300 points after inflation report as Nasdaq heads for best quarter since 2020

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    U.S. stocks were climbing Friday afternoon following a softer-than-expected inflation report for February, while the Nasdaq Composite was on pace for its largest quarterly advance since 2020.

    How stocks are trading
    • The Dow Jones Industrial Average
      DJIA,
      +1.26%
      rose 340 points, or 1%, to 33,199.

    • The S&P 500
      SPX,
      +1.44%
      gained almost 47 points, or 1.2%, to nearly 4,098.

    • The Nasdaq Composite
      COMP,
      +1.74%
      advanced almost 173 points, or 1.4%, to 12,186.

    For the week, the Dow is on track to gain 3% while the S&P was on pace to rise 3.2% and the Nasdaq Composite was heading for a 3.1% increase, according to FactSet data, at last check.

    What’s driving markets

    U.S. stocks were up sharply Friday afternoon as investors weighed data showing signs of moderating inflation.

    “Core price pressures” eased in February, Barclays said in an economics research note Friday. “On balance, the easing in February PCE inflation was fairly broad-based across goods and services, barring housing.”

    The personal-consumption-expenditures, or PCE, price index increased 0.3% in February, with inflation slowing to 5% year over year from 5.3% in January, according to a report Friday from the Bureau of Economic Analysis.

    Core PCE, the Federal Reserve’s preferred inflation gauge that excludes energy and food prices, rose 0.3% last month for a year-over-year rate of 4.6%. That’s slightly lower than forecasts from economists polled by the Wall Street Journal and softened from the 4.7% increase seen over the 12 months through January.

    Read: Inflation softens in February, PCE finds, and gives ammo for Fed rate-hike pause

    While the Federal Reserve has been battling high inflation with interest rate hikes, futures traders are betting that rates have already peaked and that the Fed will likely reverse course and cut rates at least a couple of times before the end of the year, according to the CME’s FedWatch tool.

    The market is pricing in a “coin flip” as to whether the Fed raises its benchmark rate by a quarter percentage point at its May policy meeting, said Matt Stucky, senior portfolio manager at Northwestern Mutual Wealth Management Co., in a phone interview Friday.

    “We think we’re getting pretty close to the end” of the rate-hiking cycle, he said. Stucky expects the Fed may stop hiking once “cracks” start to form in the labor market, with job losses in “nonfarm payrolls.”

    Meanwhile, consumer spending edged up 0.2% in February while personal incomes rose 0.3%, according to a Bureau of Economic Analysis report Friday.

    “Incomes and spending are hanging in there and inflation’s cooling,” said Mike Skordeles, head of U.S. economics at Truist, in a phone interview Friday. “That has positive implications for markets” and the economy, he said.

    Stocks traded higher following the release of the final reading on U.S. consumer sentiment for March from the University of Michigan. While confidence ticked lower compared with earlier estimates, inflation expectations moderated.

    U.S. stocks have held up relatively well this quarter, shrugging off the Fed rate hikes and renewed recession fears. Since hitting its highest level of the year in early February, the S&P 500 has been trading in an increasingly narrow range, leaving analysts divided about where the market might be heading next.

    “We need to see what the overall economy does,” said Kim Caughey Forrest, founder and chief investment officer of Bokeh Capital Partners. “I think GDP matters, and if GDP holds up while inflation comes down, that could be good for stocks.”

    The Nasdaq Composite has risen around 16% since the start of the year, putting it on track for its best quarterly gain since the three months through June 2020, according to FactSet data, at last check. The technology -heavy Nasdaq jumped more than 30% in the second quarter of 2020 as stocks rebounded from the global market rout tied to COVID-19 that year.

    The S&P 500 and Dow were also track for quarterly gains in late afternoon trading.

    “The bond market is definitely more concerned about recession risks than stocks are,” said Skordeles, who is expecting a recession in the second half of the year. “They couldn’t be sending more different signals.”

    Read: Two-year Treasury yields on pace for biggest monthly drop since 2008 after bank turmoil

    New York Fed President John Williams said Friday in a speech at Housatonic Community College that stress in the U.S banking system will cause banks to tighten credit and probably lead to lower consumer spending.

    Companies in focus

    —Steve Goldstein contributed to this article.

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  • Sergio Ermotti returns as UBS CEO after Credit Suisse deal

    Sergio Ermotti returns as UBS CEO after Credit Suisse deal

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    UBS Group AG said Wednesday that it has decided to appoint Sergio P. Ermotti as its new chief executive replacing Ralph Hamers, and said the change is a result of its planned acquisition of rival Credit Suisse Group AG.

    The appointment of Mr. Ermotti–who was UBS’s UBS CH:UBSG CEO in the aftermath of the global financial crisis and stepped down in 2020 after nine years in the role–will become effective on April 5, the bank said.

    Mr….

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  • Sen. Sherrod Brown: American consumers losing power over their savings and paychecks is an emergency, too.

    Sen. Sherrod Brown: American consumers losing power over their savings and paychecks is an emergency, too.

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    The collapse of Silicon Valley Bank sent shockwaves through the global economy and had the makings of another crisis. Depositors raced to withdraw money. Banks worried about the risk of contagion. I spent that weekend on the phone with small business owners in Ohio who didn’t know whether they’d be able to make payroll the next week. One woman was in tears, worried about whether she’d be able to pay her workers. 

    The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve responded quickly, took control of the bank, and contained the fallout. Consumers’ and small businesses’ money was safe. That Ohio small business was able to get paychecks out.

    The regulators were able to protect Americans’ money from incompetent bank executives because when Congress created the Federal Reserve in 1913 and the FDIC in 1933, it ensured that their funding structures would remain independent from politicians in Congress and free from political whims. 

    But now, as the U.S. Supreme Court considers the case of Community Financial Services Association v. CFPB, these independent watchdogs’ ability to keep our financial system stable faces an existential threat.

    The Consumer Financial Protection Bureau is the only agency solely dedicated to protecting the paychecks and savings of ordinary Americans, not Wall Street executives or venture capitalists. Corporate interests have armies of lobbyists fighting for every tax break, every exemption, every opportunity to be let off the hook for scamming customers and preying on families.

    “ The CFPB’s funding structure is designed to be independent, just like the Fed and the FDIC. ”

    Ordinary Americans don’t have those lobbyists. They don’t have that kind of power. The CFPB is supposed to be their voice — to fight for them. The CFPB’s funding structure is designed to be independent, just like the Fed and the FDIC. Otherwise, its ability to do the job would be subject to political whims and special interests — interests that we know are far too often at odds with what’s best for consumers.

    Since its creation, the CFPB has returned $16 billion to more than 192 million consumers. It’s held Wall Street and big banks accountable for breaking the law and wronging their customers. It’s given working families more power to fight back when banks and shady lenders scam them out of their hard-earned money. 

    The CFPB can do this good work because it’s funded independently and protected from partisan attacks, just as the Fed and the FDIC are. So why, then, does Wall Street claim that only the CFPB’s funding structure is unconstitutional?

    Make no mistake — the only reason that Wall Street, its Republican allies in Congress, and overreaching courts have singled out the CFPB is because the agency doesn’t do their bidding. The CFPB doesn’t help Wall Street executives when they fail. It doesn’t extend them credit in favorable terms or offer them deposit insurance like the other regulators do. The CFPB’s funding structure isn’t unconstitutional — it just doesn’t work in Wall Street’s favor.

    If the Supreme Court rules against the CFPB, the $16 billion returned to consumers could be clawed back. What would happen then — will America’s banks really go back to the customers they’ve wronged with a collection tin?

    “ Invalidating the CFPB and its work would also put the U.S. economy — and especially the housing market — at risk. ”

    Invalidating the CFPB and its work would also put the U.S. economy — and especially the housing market — at risk. For more than a decade, the CFPB has set rules of the road for mortgages and credit cards and so much else, and given tools to help industry follow them. If these rules and the regulator that interprets them disappear, markets will come to a standstill. 

    By attacking the CFPB’s funding structure and putting consumers’ money at risk, Wall Street is putting the other financial regulators in danger, too. 

    The Fifth Circuit’s faulty ruling against the CFPB is astounding in its absurdity — the court ruled that the authorities that other financial agencies, like the Federal Reserve and the FDIC, have over the economy do not compare to the CFPB’s authorities. In other words, the court is claiming that the CFPB supposedly has more power in the economy than the Fed.

    That’s ridiculous. Look at the extraordinary steps taken to contain the failures of Silicon Valley Bank and Signature Bank — the idea that the CFPB could take action even close to as sweeping is laughable.

    But we know why the Fifth Circuit put that absurd assertion in there — they recognize the damage this case could do to these other vital agencies, and to our whole economy.

    “ Imagine what might happen if another series of banks failed and the FDIC did not have the funds to stop the crisis from spreading.”

    The FDIC’s own Inspector General has stated that the Fifth Circuit ruling could be applied to their agency. If that happens, the FDIC and other regulators could be subject to congressional budget deliberations, which we all know are far too partisan and have resulted in shutdowns. Imagine what might happen if another series of banks failed and the FDIC did not have the funds to stop the crisis from spreading, or the Deposit Insurance Fund to protect depositors’ money. Imagine if politicians caused a shutdown, and we were without a Federal Reserve. 

    U.S. financial regulators are independently funded so that they can respond quickly when crises happen. It’s telling, though, that plenty of people in Washington don’t seem to consider the CFPB’s issues in the same category. Washington and Wall Street expect the government to spring into action when businesses’ money is put at risk. But when workers are scammed out of their paychecks, that’s not an emergency — it’s business as usual. 

    When Wall Street’s abusive practices put consumers in crisis, the CFPB must have the funding and strength it needs to carry out its mission — to protect consumers’ hard-earned money. 

    U.S. Sen. Sherrod Brown (D-OH) is chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

    More: Supreme Court to hear case that will decide the future of consumer financial protection

    Also read: Senate Banking Chair Sherrod Brown sees bipartisan support for changes to deposit insurance

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  • There’s another looming cliff — the end of the student-loan repayment moratorium

    There’s another looming cliff — the end of the student-loan repayment moratorium

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    Is the banking crisis over? Well, famous last words and all that, but in the early hours of Monday things are looking better: no bank collapsed over the weekend, SVB has a new owner, and even Deutsche Bank
    DBK,
    +6.21%
    shares are trading higher.

    Or maybe not. There’s still the issue of commercial property, which accounts for 40% of all loans made by banks outside the top 25 by assets, according to Capital Economics.

    “In a worst case scenario it’s possible that a ‘doom loop’ develops between smaller banks and commercial property, in which concerns about the health of these banks leads to deposit flight, which causes banks to call in commercial real estate loans, which then accelerates a downturn in a sector that forms a key part of its asset base, which intensifies concerns about the health of the banks and thus completes the vicious cycle,” the firm warns.

    And Thomas Simons, money market economist at Jefferies, says there’s another worry on the horizon: the looming end of the student loan repayment moratorium.

    Student loan payments will have to resume by the end of August, or possibly earlier depending on a Supreme Court decision, meaning 45 million people will have to start paying loans again.

    Related: SoFi CEO Anthony Noto on suing over student-loan payment pause: ‘I’m also protecting our shareholders’

    Citing New York Fed data, he says the average student loan payment for a borrower not in deferment was $393 per month — about 1% of spending, depending on which metric is used. “This may sound like a modest hit, but the impact on income is very similar to the tax increases associated with ‘The Fiscal Cliff’ of 2013, which was followed by a noticeable slowdown in consumption,” he says.

    Granted, pandemic savings have acted as a buffer for inflation. But roughly half of that is now gone, and those savings were concentrated in wealthier households anyway. “Households still have roughly half of the excess savings from the pandemic sitting on their balance sheets, but there is less cushion to absorb a substantial increase in outlays.,” he says.

    Student loan delinquency rates are basically zero at the moment — how can you be late when you don’t have to make payments — but those for autos, mortages and credit cards have picked up lately.

    “The strain imposed on household balance sheets by the resumption of student loan payments could cause demand for loans to pick up, but only from borrowers who are having a harder time servicing their debt,” he says.

    “Declining loan demand was already a profitability risk for small and regional banks prior to the recent emergence of stress and deposit flight. Risks have clearly increased over the last month, and they will increase further as household credit quality deteriorates,” he concludes.

    Simons didn’t even mention that the student-loan cliff coincides with another worry, the looming debt-ceiling issue. The Bipartisan Policy Center last month said the day when the federal government can no longer meet all its obligations will likely arrive in summer or early fall.

    The markets

    U.S. stock futures
    ES00,
    +0.56%

    NQ00,
    +0.41%
    were pointing higher, following the second straight week of gains for the S&P 500
    SPX,
    +0.50%    .
    The yield on the 10-year Treasury climbed to 3.46%.

    For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

    The buzz

    First Citizens Bank
    FCNCA,
    +45.50%
    is buying $72 billion of assets from the fallen Silicon Valley Bank at a $16.5 billion discount, the Federal Deposit Insurance Corp. announced, as the deposit-insurance fund is set to take a $20 billion loss. Investors cheered the deal, as First Citizens’ stock jumped 24%.

    The news lifted regional banks including First Republic Bank
    FRC,
    +19.17%
    in premarket trade.

    Fed Gov. Philip Jefferson is speaking at 5 p.m. on the transmission and implementation of monetary policy. Minneapolis Fed President Neel Kashkari told the “Face the Nation” program said the stress in the financial sector brings the U.S. closer to a recession.

    Parts of Twitter’s source code leaked online.

    McDonald’s
    MCD,
    +0.01%
    closed its stores in Israel, part of a broader shutdown that has clamped outgoing flights in protest of new judicial rules advanced by the ruling coalition.

    Novartis
    NVS,
    +7.12%
    shares rallied as the drugmaker reported positive trial data on a breast-cancer drug.

    Best of the web

    An interesting dive into Signature Bank from The American Prospect, which asks whether the bank was a failure or a patsy.

    Thousands of retirees have their savings frozen while legal battles rage around the empire of financier Greg Lindberg.

    The president of the United Auto Workers was ousted in favor of a candidate who wants a harder line with automakers.

    Top tickers

    There were the most active stock-market tickers as of 6 a.m. Eastern.

    Ticker

    		 Security name
    TSLA,
    +2.91%         		Tesla
    FRC,
    +19.17%         		First Republic
    GME,
    -4.30%         		GameStop
    BBBY,
    -2.41%         		Bed Bath & Beyond
    AMC,
    -1.23%         		AMC Entertainment
    MULN,
    -0.55%         		Mullen Automotive
    TRKA,
    -7.03%         		Troika Media
    AAPL,
    +0.01%         		Apple
    APE,
    -4.93%         		AMC Entertainment preferreds
    NVDA,
    +0.33%         		Nvidia
    The chart

    This chart captures the deposit outflows from small banks to large banks, covering data through March 15 that the Fed released after the close on Friday. Jeroen Blokland, who authors The Market Routine blog, says small bank woes increase the chance of a recession. “Contrary to 2022, markets may be right and [Fed Chair Jerome] Powell wrong on interest rates. Unfortunately, one look at earnings expectations reveals that markets are not pricing a recession at this point. I remain cautious about equities and other risky assets like real estate and high yield bonds,” he says.

    Random reads

    Tech fortunes may have dropped after the pandemic, but not demand for Crocs
    CROX,
    +0.29%    .

    The French won’t let a little revolution get in the way of a nice glass of red wine.

    The Chinese artist Ai Weiwei recreated a Monet — using Lego.

    Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

    Listen to the Best New Ideas in Money podcast with MarketWatch reporter Charles Passy and economist Stephanie Kelton.

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  • First Citizens Buys Large Parts of Failed Silicon Valley Bank

    First Citizens Buys Large Parts of Failed Silicon Valley Bank

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    First Citizens Buys Up Large Parts of Silicon Valley Bank After Collapse

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  • First Citizens enters agreement to buy Silicon Valley Bridge Bank, says FDIC

    First Citizens enters agreement to buy Silicon Valley Bridge Bank, says FDIC

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    First Citizens BancShares Inc. has entered a deal to assume all the deposits and loans of the failed Silicon Valley Bridge Bank from the Federal Deposit Insurance Corp., the regulator announced on Monday.

    As of Monday, the 17 former branches of Silicon Valley Bridge Bank, National Association, will open as First Citizens
    FCNCA,
    -1.11%    ,
    FDIC said. The FDIC has been trying to auction off Silicon Valley Bank for about two weeks, since it became the largest U.S. bank to go bust since Washington Mutual in 2008.

    As of March 10, Silicon Valley Bridge Bank had approximately $167 billion in total assets and about $119 billion in total deposits, the FDIC said. The deal included the purchase of about $72 billion of Silicon Valley Bridge Bank’s assets at a discount of $16.5 billion.

    Roughly $90 billion in securities and other assets will remain in FDIC receivership for disposition, and the regulator has received equity appreciation rights in First Citizens common stock worth up to $500 million.

    The FDIC and the Raleigh, North Carolina-based bank entered into a loss–share transaction on the commercial loans it purchased of former Silicon Valley Bridge Bank.  The FDIC said it will share in the losses and potential recoveries on the loans covered by that agreement, which is “projected to maximize recoveries on the assets by keeping them in the private sector,” and minimize disruptions for loan customers.  First Citizens will also assume all loan–related qualified financial contracts.

    The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund at roughly $20 billion, the exact cost of which will be determined when receivership is terminated.

    The FDIC created Silicon Valley Bridge Bank, National Association, following the closure of Silicon Valley Bank by the California Department of Financial Protection and Innovation.

    Speculation that First Citizens, which has bought 20 failed banks since 2009, was pursuing an acquisition of Silicon Valley National Bank emerged last week. Bloomberg, which first reported First Citizens would enter a deal for the bank on Sunday, also reported that Valley National Bancorp
    VLY,
    +2.87%
     was trying to purchase the failed bank. It said First Citizens had previously made an offer for the bank immediately after it collapsed.

    First Citizens shares have sunk 23% year to date — mostly over the past month — and are down 15% over the past 12 months, compared to the S&P 500’s
    SPX,
    +0.56%
    3.4% gain in 2023 and 13% decline over the past year.

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  • First Citizens said to near deal for Silicon Valley Bank

    First Citizens said to near deal for Silicon Valley Bank

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    First Citizens BancShares is in advanced talks to acquire Silicon Valley Bank after its collapse earlier this month, according to people familiar with the matter. 

    First Citizens could reach a deal as soon as Sunday to acquire Silicon Valley Bank from the Federal Deposit Insurance Corp., said the people, who asked to not be identified because the matter isn’t public. No final decision has been made and talks could fall through, the people added. 

    A representative for the FDIC declined to comment. First Citizens didn’t immediately respond to requests for comment.

    Silicon Valley Bank became the biggest U.S. lender to fail in more than a decade, unraveling in less than 48 hours after abandoning a plan to shore up capital. The bank took a huge loss on sales of its securities as interest rates climbed, unnerving investors and depositors who rapidly began pulling their money. 

    As of Friday, Raleigh, North Carolina-based First Citizens had a market value of $8.4 billion.

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  • Why the worst banking mess since 2008 isn’t freaking out stock-market investors — yet

    Why the worst banking mess since 2008 isn’t freaking out stock-market investors — yet

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    Judging by the major indexes, it will take more than the Federal Reserve raising interest rates in the midst of the worst banking mess since the 2008 financial crisis for stock-market investors to lose their cool.

    “Investors are broadly assuming that regulators are going to step in and ringfence the sector if need be, and that’s what keeps it from spilling over to the broader market,” said Anastasia Amoroso, chief investment strategist at iCapital, in a phone interview.

    There’s also a second reason. Investors see the banking woes forcing the Fed to pause the rate-hike cycle or even begin cutting as early as June, she noted. An end to the yearlong rise in rates will remove a source of pressure on stock-market valuations.

    But gains last week, which came amid volatile trading, aren’t sending an all-clear signal, stock-market analysts and investors said.

    Banking worries haven’t gone away after the failure of three U.S. institutions earlier this month and UBS Group AG’s
    UBS,
    -0.94%

    UBSG,
    -3.55%
    agreement to acquire troubled Swiss rival Credit Suisse
    CS,
    -1.23%

    CSGN,
    -5.19%
    in a merger forced by regulators. Jitters were on display Friday when shares of German financial giant Deutsche Bank
    DB,
    -3.11%

    DBK,
    -8.53%
    got drubbed.

    It’s the fear of runs on U.S. regional banks that still keep investors up at night. Markets might face a test Monday if investors react to Federal Reserve data released after Friday’s closing bell showed deposits at small U.S. banks dropped by a record $119 billion in the weekly period ended Wednesday, March 15, following Silicon Valley Bank’s collapse the preceding Friday.

    That sensitivity to deposits was on display last week. U.S. Treasury Secretary Janet Yellen was blamed for a late Wednesday selloff that saw the Dow end over 500 points lower after she told lawmakers that her department hadn’t considered or discussed a blanket guarantee for deposits. On Thursday, she told House lawmakers that, “we would be prepared to take additional actions if warranted.”

    Deposits are “the epicenter of the crisis of confidence” in U.S. banks, said Kristina Hooper, chief global market strategist at Invesco, in a phone interview. Anything that suggests there won’t be full protection for deposits is bound to worry investors in a charged environment.

    See: Is the deposit insurance system broken? 9 things you need to know.

    Cascading runs on regional banks would stoke fears of further bank failures and the potential for a full-blown financial crisis, but short of that, pressure on deposits also underline fears the U.S. economy is headed for a credit crunch.

    Speaking of a credit crunch. Deposits across banks have been under pressure after the Federal Reserve began aggressively raising interest rates roughly a year ago. Since then, deposits at all domestic banks have fallen by $663 billion, or 3.9%, as money flowed into money-market funds and bonds, noted Paul Ashworth, chief North American economist at Capital Economics, in a Friday note.

    “Unless banks are willing to jack up their deposit rates to prevent that flight, they will eventually have to rein in the size of their loan portfolios, with the resulting squeeze on economic activity another reason to expect a recession is coming soon,” he wrote.

    Related: Bank of America identifies the next bubble and says investors should sell stocks rather than buy them after the last rate increase

    Meanwhile, activity in U.S. capital markets has largely dried up since Silicon Valley Bank’s collapse on March 10, noted Torsten Slok, chief global economist at Apollo Global Management, in a recent note.


    Apollo Global Management

    There was virtually no investment-grade or high-yield debt issuance and no initial public offerings on U.S. exchanges, while merger and acquisition activity since then represents completed deals that were initiated before SVB’s collapse, he said (see chart above).

    “The longer capital markets are closed, and the longer funding spreads for banks remain elevated, the more negative the impact will be on the broader economy,” Slok wrote. 

    The Dow Jones Industrial Average
    DJIA,
    +0.41%
    rose 1.2% last week, ending a back-to-back run of declines. The S&P 500
    SPX,
    +0.56%
    rose 1.4%, recouping the large-cap benchmark’s March losses to turn flat on the month. The Nasdaq Composite
    COMP,
    +0.31%
    saw a 1.7% weekly rise, leaving the tech-heavy index up 3.2% for the month to date.

    Regional bank stocks showed some signs of stability, but have yet to begin a meaningful recovery from steep March losses. The SPDR S&P Regional Banking ETF
    KRE,
    +3.03%
    eked out a 0.2% weekly gain but remains down 29.3% in March. KRE’s plunge has taken it back to levels last seen in November 2020.

    Look beneath the surface, and the stock market appears “bifurcated,” said Austin Graff, chief investment officer and founder of Opal Capital.

    Much of the resilience in the broader market is attributable to gains for megacap technology stocks, which have enjoyed a flight-to-safety role, he said in a phone interview.

    The megacap tech-heavy Nasdaq-100
    NDX,
    +0.30%
    was up 6% in March through Friday’s close, according to FactSet, while regional bank shares dragged on the small-cap Russell 2000
    RUT,
    +0.85%    ,
    down 8.5% over the same stretch.

    For investors, “the expectation should be for continued volatility because we do have less money flowing through the economy,” Graff said. There’s more pain to be felt in highly levered parts of the economy that weren’t prepared for the speed and scope of the Fed’s aggressive rate increases, including areas like commercial real estate that are also struggling with the work-from-home phenomenon.

    Graff has been buying companies in traditionally defensive sectors, such as utilities, consumer staples and healthcare, that are expected to be resilient during economic downturns.

    Read: ‘Some losses’ in commercial real estate and Treasurys may still need to work ‘through the banking sector,’ says Fed’s Kashkari

    Invesco’s Hooper said it makes sense for tactical allocators to position defensively right now.

    “But I think there has to be a recognition that if the banking issues that we’re seeing do appear to be resolved and the Fed has paused, we are likely to see a market regime shift…to a more risk-on environment,” she said. That would favor “overweight” positions in equities, including cyclical and small-cap stocks as well as moving further out on the risk spectrum on fixed income.

    The problem, she said, is the well-known difficulty in timing the market.

    Amoroso at iCapital said a “barbell” approach would allow investors to “get paid while they wait” by taking advantage of decent yields in cash, short- and long-term Treasurys, corporate bonds and private credit, while at the same time using dollar-cost averaging to take advantage of opportunities where valuations have been reset to the downside.

    “It doesn’t feel great for investors, but the reality is that we’re likely trapped in a narrow range for the S&P for a while,” Amoroso said, “until either growth breaks to the downside or inflation breaks to the downside.”

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  • Lululemon, Intel, Carnival, Micron, Walgreens, and More Stocks to Watch This Week

    Lululemon, Intel, Carnival, Micron, Walgreens, and More Stocks to Watch This Week

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    Data on the U.S. consumer and housing market, plus several notable earnings reports, will be this week’s highlights. Barring any surprises, federal financial regulators’ Congressional testimony will be the main event on the banking front.

    On Wednesday, Fed Vice Chair for Supervision Michael Barr and Federal Deposit Insurance Corp. Chairman Martin Gruenberg are scheduled to testify before the House Financial Services Committee. They’ll discuss the collapses of Silicon Valley Bank and Signature Bank and efforts to maintain confidence in the U.S. banking system.

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  • U.S. stocks end higher, S&P 500 books back-to-back weekly gains despite bank jitters spurred by Deutsche Bank

    U.S. stocks end higher, S&P 500 books back-to-back weekly gains despite bank jitters spurred by Deutsche Bank

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    U.S. stocks finished Friday higher, despite a jump in the cost of Deutsche Bank’s credit-default swaps helping to reignite banking-sector worries. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite each booked weekly gains.

    How stocks traded
    • The Dow Jones Industrial Average
      DJIA,
      +0.41%
      rose 132.28 points, or 0.4%, to close at 32,237.53.

    • The S&P 500
      SPX,
      +0.56%
      gained 22.27 points, or 0.6%, to finish at 3,970.99.

    • The Nasdaq Composite
      COMP,
      +0.31%
      added 36.56 points, or 0.3%, to end at 11,823.96.

    For the week, the Dow gained 1.2%, while the S&P 500 rose 1.4% and the Nasdaq advanced 1.7%, according to FactSet data. The Dow snapped two straight weeks of losses, while the S&P 500 and Nasdaq each booked back-to-back weekly gains.

    What drove markets

    U.S. stocks ended modestly higher Friday to notch weekly gains even as worries over the banking system lingered.

    Bank concerns have cast a “heavy cloud over the market,” with investors worried about “weak links,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, in a phone interview Friday. Ma said he expects investors will be looking to sell, potentially into any rallies, “until some of these clouds are lifted.”

    Shares of Germany’s Deutsche Bank AG
    DBK,
    -8.53%

    DB,
    -3.11%
    dropped Friday, after the cost of insuring the bank against a credit default jumped. The bank’s credit-default swaps had risen to the highest level since late 2018, according to a Reuters report Friday.

    Treasury Secretary Janet Yellen announced Friday she called an unscheduled meeting of the Financial Stability Oversight Council or FSOC which was created in the wake of the 2008 financial crisis to help the government combat threats to financial stability. The FSOC issued a short statement after the market closed Friday saying that “while some institutions have come under stress, the U.S. banking system remains sound and resilient”.

    “Clearly, somebody thinks there are some concerns there,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. The problems facing European banks stem back to the era of negative interest rates, which set banks up for large losses on their bond holdings, he said.

    The selloff in Deutsche Bank shares weighed on banks in the U.S. and Europe, as banking-sector fears reemerged. Shares of UBS Group
    UBS,
    -0.94%    ,
    which recently agreed to buy rival Credit Suisse Group, fell Friday.

    Other major European lenders, including Italy’s UniCredit S.p.A
    UCG,
    -4.06%
    and Spain’s Banco Santander SA
    SAN,
    -3.00%    ,
    also saw their shares sink.

    “The thing that’s important to know about financials is there probably are banks that have problems, but there are others that don’t,” Frederick told MarketWatch during a phone interview. “People need to do some research.”

    The S&P 500’s financial sector fell 0.1% Friday, according to FactSet data.

    While banking-sector woes have hammered the financial sector this month, the outperformance of megacap technology stocks and other sectors have helped prop up the broader U.S. equities market. So far this month, the S&P 500 index is up less than 0.1%, FactSet data show.

    Concerns about the fragility of the banking sector have been percolating following a year of the Federal Reserve’s aggressive interest rate hikes. On Wednesday, the Fed announced that it hiked its policy rate by a quarter point to a range of 4.75% to 5% while projecting it could deliver one more 25 basis-point hike in 2023.

    In his first comments since the rapid collapse of Silicon Valley Bank two weeks ago, St. Louis Federal Reserve President James Bullard said Friday the latest drop in Treasury yields could help cushion some of the stress facing the banking sector.

    Yields on the 2-year Treasury note
    TMUBMUSD02Y,
    3.779%
    and 10-year Treasury note
    TMUBMUSD10Y,
    3.376%
    each fell Friday in their third straight week of declines, according to Dow Jones Market Data. Two-year yields slid to 3.777% on Friday, the lowest level since September based on 3 p.m. Eastern time levels, while 10-year Treasury yields dropped to 3.379%, their lowest rate since January.

    Read: ‘Red alert recession signals.’ Gundlach expects the Fed to cut rates substantially ‘soon.’

    In U.S. economic data, a report Friday on sales of durable goods showed orders fell 1% in February, largely because of waning demand for passenger planes and new cars. Meanwhile, the S&P Global Flash U.S. services-sector index rose to an 11-month high of 53.8 in March.

    The role of regional banks in the U.S. economy is “huge,” said Sandi Bragar, chief client officer at wealth management firm Aspiriant, in a phone interview Friday. Bragar said she worries that recent regional bank failures will result in a pullback in lending that leads to slower economic growth and potentially a recession.

    “Our stance has been to be very diversified and we have been remaining on the defensive side of things,” she said.

    Within equities, that has meant holding “high-quality companies” that should be resilient in “poor economic times,” including stocks in areas such as healthcare, information technology and consumer staples, said Bragar.

    Companies in focus

    –Steve Goldstein contributed to this report.

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  • Bank of America identifies the next bubble and says investors should sell stocks rather than buy them after the last rate hike

    Bank of America identifies the next bubble and says investors should sell stocks rather than buy them after the last rate hike

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    Another bubble has emerged, courtesy of the bank-sector crisis which has already felled three U.S. regional banks.

    Bank of America analysts led by the Michael Hartnett say money-market funds are the new hot asset.

    They point out that assets under management for money funds has now exceeded $5.1 trillion, up over $300 billion over the past four weeks. They also counted the biggest weekly flows to cash since March 2020, the biggest six-week inflow to Treasurys ever, and the largest weekly outflow from investment-grade bonds since Oct. 2022.

    The last two times money-market fund assets surged — in 2008 and in 2020 — the Federal Reserve slashed interest rates. Hartnett is fond of the saying, “markets stop panicking when central banks start panicking,” and he noted a surge in emergency Fed discount window borrowing has historically occurred around a big stock-market low.

    There is one difference this time, in that inflation is a reality and that labor markets, not just in the U.S. but in other industrialized nations, remains exceptionally strong. The Bank of America team counted 46 interest rate hikes this year, including by the Swiss National Bank after its rescue of Credit Suisse last week.

    History, according to the BofA team, says to sell the last interest rate hike. “Credit and stock markets are too greedy for rate cuts, not fearful enough of recession,” they say. After all, when banks borrow from the Fed in an emergency, they tighten lending standards, which in turn results in less lending, and that leads to less small-business optimism, which eventually cracks the labor market.

    Bond yields
    TMUBMUSD10Y,
    3.311%
    and U.S. stock futures
    ES00,
    -0.84%
    dropped on Friday, as shares of Deutsche Bank tumbled in Frankfurt.

    The S&P 500
    SPX,
    +0.30%
    has gained just under 1% this week.

    See also: Money-market funds swell to record $5.4 trillion as savers pull money from bank deposits

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  • Deutsche Bank shares slump in latest sign of bank worries

    Deutsche Bank shares slump in latest sign of bank worries

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    Deutsche Bank shares slumped on Friday, putting the health of another globally systemic important bank in the spotlight heading into the weekend.

    The German lender’s shares
    DBK,
    -8.53%
    fell 10% in Frankfurt trade, and the Euro Stoxx bank index
    SX7E,
    -4.61%
    fell 5%.

    Deutsche Bank’s 5-year credit-default swaps widened on Thursday, in what Reuters reported was the largest one-day rise in its history. And on Friday, they widened again.

    It should be noted that Deutsche Bank’s 5-year credit-default swap, which was 215 on Friday, is nowhere near the peak for Credit Suisse, which was 1,194, according to S&P Global data. The higher the value of the CDS, the more likely the market sees the issuer defaulting.

    Deutsche Bank’s AT1 bonds have tumbled in value after Switzerland wiped out Credit Suisse’s
    CSGN,
    -5.19%
    securities in the deal for it to be taken over by UBS
    UBSG,
    -3.55%    .

    The Invesco AT1 Capital Bond UCITS ETF
    AT1,
    -1.97%    ,
    which invests in these convertible bonds, has dropped 18% this month as investors lose faith in the securities. European and other banking regulators across the globe have insisted they will not follow Switzerland’s precedent, and first let bank equity fall to zero before wiping out the convertible securities in the event of a failure.

    “It is doubtful that banks will be able to issue new AT1 anytime soon, increasing the likelihood of outstanding AT1 notes being extended. We consider that the recent events in the banking sector have resulted in substantially increased uncertainty, which is likely to continue to be reflected as substantial short-term volatility in credit markets,” said analysts at ING.

    UBS
    UBS,
    -0.94%
    also is feeling the stress in a deal that the banks say might not complete this year. UBS shares dropped 6%.

    Related: Analysts say UBS will face revenue pressure before it can cut Credit Suisse costs.

    Analysts also noted that a foreign institution tapped a Fed facility for $60 billion, according to data released by the U.S. central bank on Thursday. The Fed does not identify the counterparties. Major central banks do have access to swap lines for dollar borrowing from the Fed, meaning that either it was an institution that does not have that capability, or it was one that wanted to do so anonymously.

    Furthermore, Bloomberg News reported the U.S. government was investigating banks including Credit Suisse and UBS for allegedly helping Russians evade U.S. sanctions.

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  • ‘This is a risk confronting all banks,’ ex-FDIC chief Sheila Bair tells MarketWatch

    ‘This is a risk confronting all banks,’ ex-FDIC chief Sheila Bair tells MarketWatch

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    Regional banks shouldn’t be the only source of worry for potential fallout from the Federal Reserve’s rapid pace of interest-rate hikes in the past year, said a former top banking regulator.

    “I don’t see regional banks as having any particular problem,” said Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011, in an interview with MarketWatch on Thursday. “We need to be mindful of all unmarked securities at banks — small, medium and large.”

    Bair called the hyperfocus on regional banks and interest-rate risks “counter productive” in the wake of the collapse earlier in March of Silicon Valley Bank and Signature Bank
    SBNY,
    -22.87%
    of New York.

    “This is a risk confronting all banks,” she said. “All examiners need to be on alert for how interest-rate risk is being managed. If there is a run, they will need to sell these securities. Those are the kinds of things all-size banks, and all examiners should be worried about.”

    A run on deposits at Silicon Valley Bank snowballed after it disclosed a $1.8 billion loss on a sudden sale of $21 billion worth of high-quality, rate-sensitive mortgage and Treasury securities. It was the biggest U.S. bank failure since Washington Mutual’s collapse in 2008.

    The FDIC estimated that U.S. banks had some $620 billion of unrealized losses from securities on their books as of the end of 2022, including longer-duration Treasurys and mortgage securities that have become worth less than their face value.

    “Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry,” FDIC Chairman Martin Gruenberg said on March 6, in a speech at the Institute of International Bankers.

    Days after that gathering, Silicon Valley Bank and Signature Bank both collapsed, prompting regulators to roll out a new emergency bank funding program to help head off any liquidity strains at other U.S. lenders. Regulators also backstopped all deposits at the two failed lenders.

    Bair earlier this month argued that if U.S. banking authorities see systemic risks they should go to Congress and ask for a backstop against uninsured deposits, beyond the standard $250,000 cap per depositor, at a single bank. Specifically, she wants zero-interest accounts, or those used for payroll and other operational expenses, to be fully covered, as was the case for a few years in the wake of the global financial crisis to stop runs on community banks.

    Treasury Secretary Janet Yellen said Wednesday that blanket deposit insurance protection isn’t something her department is considering, but added that the appropriate level of protection could be debated in the future.

    Fed Chairman Jerome Powell on Wednesday said the U.S. banking system “is sound and resilient, with strong capital and liquidity,” after hiking rates by another 25 basis points to a range of 4.75% to 5%, up from almost zero a year ago.

    See: Fed hikes interest rates again, pencils in just one more rate rise this year

    Bair has been calling for a pause on Fed rate hikes since December. She said that instead of raising rates by another 25 basis points on Wednesday, Fed Chair Powell should have hit pause and said the central bank needs time to assess.

    “If we have a financial crisis, we won’t have a soft landing,” Bair said. “We have to avoid that at all costs.”

    Read: Bank failures like SVB are a reminder that ‘risk-free’ assets can still wreck portfolios

    Stocks closed modestly higher Thursday in choppy trade, with the Dow Jones Industrial Average
    DJIA,
    +0.23%
    up 0.2% and S&P 500 index
    SPX,
    +0.30%
    advancing 0.3%, while the Nasdaq Composite Index
    COMP,
    +1.01%
    gained 1%.

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  • Moody’s sees risk that U.S. banking ‘turmoil’ can’t be contained

    Moody’s sees risk that U.S. banking ‘turmoil’ can’t be contained

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    Despite quick action by regulators and policy makers, there’s a rising risk that banking-system stress will spill over into other sectors and the U.S. economy, “unleashing greater financial and economic damage than we anticipated,” said Moody’s Investors Service, one of the Big Three credit-ratings firms.

    Simply put, the risk is that officials “will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector,” Atsi Sheth, Moody’s managing director of credit strategy, and others wrote in a note distributed on Thursday. Still, the agency’s baseline view is that U.S. officials will “broadly succeed.”

    Moody’s warning came as Treasury Secretary Janet Yellen indicated that the U.S. could take additional actions if needed to stabilize the banking system, and after Federal Reserve Chairman Jerome Powell assured Americans on Wednesday that the central bank would use its tools to protect depositors.

    Read: Regional banks get the attention, but worries are more widespread, says ex-FDIC chief Bair and Debate over expanding deposit insurance weighs on bank stocks. Here’s what to know.

    Beneath the surface, though, is lingering worry. Hedge-fund manager Bill Ackman, for example, is warning of an acceleration of deposit outflows from banks and the latest global fund manager survey from Bank of America
    BAC,
    -2.42%
    found that 31% of 212 managers polled regard a systemic credit crunch as the biggest threat to markets.

    Of the three ways in which banking-system troubles could spill over more broadly, one of them is potentially the “most potent,” according to Moody’s: That is a general aversion to risk by financial-market players and a decision by banks to retrench from providing credit. Such a scenario could lead to the “crystallization of risk in multiple pockets simultaneously,” the ratings agency said.


    Source: Moody’s Investors Service

    “Over the course of 2023, as financial conditions remain tight and growth slows, a range of sectors and entities with existing credit challenges will face risks to their credit profiles,” the Moody’s team wrote. Banks are not the only type of players with exposure to interest-rate shocks, and “market scrutiny will focus on those entities that are exposed to similar risks as the troubled banks.”

    A second potential channel for spillover is through the direct and indirect exposure to troubled banks that private and public entities have — via deposits, loans, transactional facilities, essential services, or holdings in those banks’ bonds and stocks. And a third way in which banking problems could spread more broadly is through a misstep by policy makers, who have been focused on inflation and may not be able to respond effectively enough to evolving developments, Moody’s said.

    On Thursday, U.S. stocks
    DJIA,
    +0.23%

    SPX,
    +0.30%

    COMP,
    +1.01%
    finished higher as investors continued to weigh the risks to the banking sector. The policy-sensitive 2-year Treasury yield
    TMUBMUSD02Y,
    3.833%
    fell to its lowest level this year, while gold futures settled at a more than one-year high.

    Last week, Fitch Ratings said that nonbank financial institutions, insurers, and funds were experiencing a variety of “knock-on effects” as the result of the sudden deterioration of a few U.S. banks.

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  • How First Republic stock’s tailspin started and why it hasn’t stopped

    How First Republic stock’s tailspin started and why it hasn’t stopped

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    Shortly after Silicon Valley Bank disclosed on March 8 that it was running short of cash and needed to raise capital, First Republic Bank’s epic stock slide began.

    The stock
    FRC,
    -15.47%
    has lost 90% of its value in less than two weeks, hitting an all-time low of $12.18 a share on Monday.

    Supportive comments from Treasury Secretary Janet Yellen helped it snap back on Tuesday, but it’s hovering between positive and negative territory on Wednesday as investors await a key Federal Reserve decision on interest rates.

    First Republic finds itself in a tough spot with a low share price and fresh debt downgrades and not even efforts to inject $30 billion into the company’s deposits in a scheme backed by JPMorgan Chase & Co.
    JPM,
    -2.58%
    and a backstop from the U.S. Federal Reserve seem to be helping.

    The bank’s troubles stem from its overlap both in clientele and parts of its balance sheet with doomed Silicon Valley Bank, which is being sold off this week by the Federal Deposit Insurance Corp. after it officially failed on Friday, March 10. Silicon Valley Bank suffered a classic run on a bank, when depositors, nervous that it needed to raise capital, yanked their deposits.

    First Republic has suffered the same deposit flight.

    As a San Francisco bank with a focus on serving high-end clients, First Republic has acted as wealth manager for the greater Silicon Valley region of executives, managing directors and startup CEOs, as well as their counterparts on the East Coast.

    The list incudes Facebook
    META,
    -1.16%
    Founder Mark Zuckerberg, who has a large mortgage courtesy of First Republic, as the Wall Street Journal has reported. Few of its loans ever sour — it had $213 billion in assets at the end of 2022 and $176 billion in deposits.

    With its sophisticated lending products and access to the technology startup world, Silicon Valley Bank was also known for its a customer base from the venture capital and private equity world. 

    Also Read: 24 bank stocks that contrarian bottom-feeders can feast on now

    Those well-heeled clients of both banks started running into problems as interest rates rose last year, pundits warned of an economic slowdown and investors switched to a risk-off strategy of conserving cash and containing costs.

    The collapse of FTX and strain in the crypto world also fed the need for cold, hard government-backed currency. Rising interest rates made it more expensive to borrow and put a chill on the deal-making environment.

    All of this and other factors led to a drain on deposits at Silicon Valley Bank and others as it faced “elevated client cash burn” at a rate that was double pre-2021 levels, even as venture capital and private equity funds were slowing down their capital raising activities, the company said in an ill-fated mid-quarter report.

    On March 8 after the market close, Silicon Valley Bank said it planned to sell $2.25 billion in common stock and a type of preferred stock, with one of its major clients, private equity firm General Atlantic, in line to buy $500 million worth. Goldman Sachs Group Inc.
    GS,
    -1.14%
    was handling the deal.

    The company also disclosed that it had lost $1.8 billion on the sale of $21 billion in available-for-sale securities on its balance sheet to cover deposit withdrawals.

    It was this last part that caused big trouble for First Republic. Not only did its clientele overlap with Silicon Valley Bank, its holdings included some of the same securities that Silicon Valley Bank sold at a loss.

    Wall Street investors quickly started bidding down shares of First Republic and other regional banks and the credit rating agencies moved in, cutting the bank’s rating from investment grade deep into junk in just a few days.

    None of this helped First Republic hold on to its deposits.  

    As one longtime banking official said recently, money from Silicon Valley types typically comes in the form of uninsured deposits, which means they’re in excess of the $250,000 that the FDIC will guarantee if a bank goes out of business. This so called hot-money is great for banks when times are good, but can move away quickly if the environment changes.

    “When hot money gets nervous, it runs,” former FDIC chairman Bill Isaac told MarketWatch recently.

    While an unprecedented effort on March 16 by 11 banks to inject $30 billion into First Republic’s deposits temporarily provided a lift to its stock, the move apparently wasn’t enough.

    First Republic said last Thursday that it had borrowed between $20 billion and $109 billion from the Federal Reserve during that week. It also increased short-term borrowing from the Federal Home Loan Bank by $10 billion at a rate of 5.09%.

    Jefferies analyst Ken Usdin said the numbers revealed that First Republic’s total deposits had dropped by up to $89 billion in the week ended March 17 past week—or about three times more than the $30 billion injection from the bank.

    “With [First Republic’s] earnings profile clearly impaired, the new deposits effectively bridge the estimated $30.5 billion of uninsured deposits still on [the bank’s] balance sheet, providing time for [it] to likely explore a sale,” Usdin said.

    Janney Montgomery Scott analyst Tim Coffey said First Republic’s stock drop in recent days reflects uncertainty around what a potential second bailout would look like, or how the bank’s balance sheet is faring after a steep run in deposits and the falling value of its long-dated securities.

    Another unknown is the company’s latest Tier 1 capital Ratio, a key measure of a bank’s balance sheet strength.

    Like Silicon Valley Bank, First Republic’s balance sheet has had more than the usual exposure to long-dated securities, which have been falling in value as interest rates rise. 

    A typical mix for a bank of comparable size is to hold about 72% of securities as available for sale. The remaining 28% are held to maturity. First Republic’s mix is reversed with 12% available for sale and 88% held to maturity.

    The bank’s mix of longer-dated assets now commands a lower market value, given where interest rates are. The bank’s emphasis on long-dated securities provided a better return when interest rates were near zero, but they have been a liability in the current environment.

    “They’ve had duration risk where the value of their securities started going down as interest rates rose,” Coffey told MarketWatch.

    Another problem for First Republic is that many of those long-dated securities are in the mortgage business, which has been ailing as interest rates rise.

    Plenty of questions remain about First Republic’s situation and whether it could have been avoided. The challenges facing First Republic as well as the demise of Silicon Valley Bank and Signature Bank will be the focus of hearings on Capitol Hill next week.

    Wall Street is also awaiting comments from the U.S. Federal Reserve when it updates its interest rate policy later on Wednesday.

    And JPMorgan Chase continues to work with First Republic on a potential bailout, even as the bank has reportedly hired Lazard
    LAZ,
    -2.17%
    to weigh strategic alternatives.

    All of these factors add to the uncertainty swirling around First Republic, giving investors little reason to go long on the stock for now.

    Also Read: 24 bank stocks that contrarian bottom-feeders can feast on now

    Related: Senate Banking Chair Sherrod Brown sees bipartisan support for changes to deposit insurance

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  • What are CoCos and why are Credit Suisse’s now worth zero?

    What are CoCos and why are Credit Suisse’s now worth zero?

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    The Swiss regulator on Sunday announced that it was writing the value of Credit Suisse’s additional Tier 1 bonds — also called AT1 bonds, or contingent convertible bonds or CoCos — down to zero, as part of the bank’s merger with UBS.

    The news has spooked investors of the AT1 market, which is valued at about $275 billion.

    For more: The $275 billion bank convertible bond market thrown into turmoil after Credit Suisse’s securities wiped out

    But what are Cocos and why should you care? Here’s what you need to know:

    CoCos, or contingent convertible capital instruments, to give them their full name, are hybrid capital instruments that are structured to absorb losses in times of stress. They were introduced after the 2008 financial crisis to help steer risk away from taxpayers and onto bondholders.

    They are bonds that automatically convert into equity—shares in the bank—when a bank’s capital falls below a certain threshold.

    If a bank is functioning normally, investors are paid a coupon, just like any bondholder. But if things go wrong, the bank can “bail in” the CoCo investor, converting debt into shares in what would then be a troubled lender.

    Also read: Saudis, Qataris and Norway to see big losses on UBS deal for Credit Suisse

    European banks liked to issue CoCos, because they are counted as additional Tier 1 capital. They’re a way for banks to improve their capital ratios, as required under rules put in place after the crisis, without issuing more shares.

    U.S. banks don’t issue CoCos—they use a different type of preferred stock to boost their Tier 1 capital. But U.S. investors have been buyers of CoCos for the extra yield they have offered. That’s risky because the instruments can be converted to low-value shares, or entirely wiped out as has now happed with those issued by Credit Suisse
    CSGN,
    -55.74%

    CS,
    -52.98%    .

     CoCos are perpetual bonds, or bonds that have no set maturity date. They can be redeemed if a bank exercises an option to do so, typically after a five-year period. But regulators may block banks from redeeming them, if the cost of issuing replacement debt is much higher. And if a bank becomes highly stressed like Credit Suisse, they can simply be written off.

    A call for Credit Suisse bondholders is expected to take place on March 22, according to law firm Quinn Emanuel Urquhart & Sullivan, which said on Monday it is exploring potential legal actions on behalf of AT1 bondholders.

    The surprise for some investors on Monday is that the Swiss move has wiped out the bondholders but not the shareholders, even though bondholders typically rank above equity holders in capital structure.

    Not the Credit Suisse CoCos, which were structured to allow for the Swiss regulatory move.

    Under the terms of the deal with UBS, Credit Suisse shareholders will be able to exchange their shares for about 0.70 francs, which is below where the stock closed Friday, but more than the bondholders will receive.

    Most of the demand for CoCos in recent years has come from private banks and retail investors, especially in Europe and Asia, along with big U.S. institutional investors who were attracted by the higher yields in the low-interest-rate environment that prevailed from the crisis until the Federal Reserve started raising interest rates last year.

    To be sure, the Credit Suisse CoCos were showing signs of stress last week as the bank became more embroiled in crisis. The bank’s 9.75% coupon CoCo bonds due June of 2028 were trading at an average price of 36 cents on the dollar last Wednesday, as MarketWatch’s Joy Wiltermuth reported.

    Now fund managers say investors are likely to avoid them, undermining their use for banks.

    “The UBS-CS deal might have avoided an immediate risk event, but the AT1 write down has added an uncertainty which could persist for weeks if not months,” said Mohit Kumar, chief financial economist in Europe at Jefferies.

    “Given the large amount of AT1s outstanding, this would also raise the prospect of losses for other investors and the ability of banks to use them as a funding source in the future,” he added.

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