The banks had a meltdown. What happens afterwards?

New York (CNN) Global banks have just suffered their worst week since 2008. What next?

The fallout from this month’s banking turmoil – the startling 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 it’s a repeat of the global financial crisis of 15 years ago. Daily customer deposits are guaranteed and regulators around the world say the banking system remains sound.

Credit Suisse and First Republic: Two other banks faltered but remained standing throughout the week. Beleaguered megabank Credit Suisse announced last week that it would need up to $53.7 billion in support from 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.

Yet those lifelines might not be enough to keep them afloat. U.S.-traded shares of Credit Suisse were down nearly 7% and First Republic shares plunged about 33% on Friday. JPMorgan analysts wrote this week that a takeover of Credit Suisse by UBS seems likely.

U.S. commercial bank earnings have been under pressure due to 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 came largely from the struggling tech and crypto sectors. These banks also held an unusually high proportion of their customers’ deposits in Treasuries — the value of which fell when the Fed began raising interest rates, she said.

First Republic does not have the same problems as Silicon Valley Bank. Long-term treasury bills accounted for 55% of all SVB assets and only 15% of those in the First Republic.

“Ultimately, investors must decide whether these individual/idiosyncratic crises add to growing concerns or mark the beginning of crisis contagion,” Shah wrote in a note last week.

Another red flag: But these meltdowns may not be entirely idiosyncratic.

Before its collapse, SVB had become the biggest borrower of the Federal Home Loan Bank of San Francisco. The FHLB has been called a “lender of last resort” by Fed staff. Silvergate Bank, another recently collapsed bank that largely backed the cryptocurrency sector, also borrowed heavily from the FHLB system, according to the Brookings Institution.

First Republic has also been a heavy borrower from the FHLB. The bank had about $14 billion in loans at the end of 2022, up from just $3.7 billion in 2021.

Another bank that has taken large 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 banks taking money from the FHLB and participating in the Federal Reserve’s emergency term loan program, which lent $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 overheated economy,” Bank of America economists Ethan Harris and Shruti Mishra wrote on Friday.

But that raises red flags. There was a sharp increase in borrowing from the Fed’s discount window to $153 billion from $5 billion last Wednesday. This is the largest loan amount ever recorded.

“The sharp increase in banks’ emergency borrowing from the Fed’s discount window reflects funding and liquidity strains on banks, driven by weakening depositor confidence following a bank sell-off. and two bank failures,” Moody’s analysts wrote last week. The data, they said, is “consistent with Moody’s negative outlook on the US banking system”.

Stay alert, but don’t panic: So what should a concerned investor or bank customer do? Stay calm, but vigilant, analysts say. “Looking ahead, investors will need to watch what’s happening at regional banks with consumer deposits and loans and corporate loans,” said Torsten Slok, chief economist at Apollo Global Management.

Meta’s U-turn

Meta Platforms shareholders rejoiced last week after founder and CEO Mark Zuckerberg announced a long-awaited shift in the company’s strategy and steps to strengthen its balance sheet.

The tech giant said last Tuesday it planned to cut 10,000 more workers, marking its second round of mass layoffs in four months. Zuckerberg said in a letter to staff the same day that the company was shifting its focus from the metaverse to artificial intelligence.

The changes come after Facebook rebranded to Meta last year to signify its costly move to the virtual world. Shareholders reacted negatively to the company’s strategy and demanded it cut costs as the Federal Reserve raised interest rates, increasing pressure on markets and the economy. Shares of the stock thus fell about 70% in 2022.

So what does Meta’s flip-flop mean? Analysts say these cost-cutting measures and the shift to AI are what Wall Street has been waiting for all along.

Investors certainly seem satisfied. Shares of Meta are up nearly 9% in the past week.

“The layoffs have been music to the ears of investors who have been fed up with Zuckerberg and Facebook spending money like an 1980s rockstar for the past few years,” said Dan Ives, senior equity research analyst at Wedbush. Securities.

The company’s shift in focus to AI has helped convince investors that Meta is focused on improving current performance rather than the metaverse, which could take years to monetize.

Additionally, the company’s prioritization of AI comes as competitors consolidate their own stakes in the space, suggesting that Meta doesn’t want to be left behind by other tech giants in the craze. for AI. Microsoft said in February it was using technology that powers ChatGPT for its search engine, Bing. Google announced its own AI product, Bard, a day earlier.

While some think Meta is out of the woods when it comes to its setbacks, it will likely have a tough road ahead when it comes to competing with its giant tech peers.

“There’s a game of thrones going on in technology around AI,” Ives said. “They have clear growth challenges ahead.”


Monday: The President of the European Central Bank (ECB), Christine Lagarde, speaks; Weekly reserve balances with the Federal Reserve Banks are published.

Tuesday: Sales of existing homes in the United States.

Wednesday: The FOMC releases its latest policy rate decision and economic projections. Federal Reserve Chairman Jerome Powell answers questions from reporters.

THURSDAY: The Bank of England publishes its latest policy rate decision; U.S. building permits, new home sales, and early unemployment insurance claims.

Friday: Durable Bond Orders and Basic PMI in the United States.

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