10 charts that explain the current banking crisis: Morning Brief

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Friday, March 17, 2023

Today's newsletter is by Ethan Wolff-Mann, senior editor at Yahoo Finance. Follow him on Twitter @ewolffmann.

The understanding of what just happened — or is happening — to the U.S. banking system will take years to untangle. After all, we are still talking about 2008.

On Thursday, the latest shoe dropped when a consortium of 11 U.S. banks injected $30 billion into troubled bank First Republic (FRC), stabilizing the company at a time when it appeared to teeter on the verge of becoming the fourth U.S. bank to fail in the last two weeks.

But over the last few weeks, a clearer narrative has begun to come together on what has happened so far in this crisis.

A narrative that we think can be told through the following charts, which illustrate much of the path the economy has traveled since the pandemic.

Let’s get into it.

Our first chart shows inflation. You already know it’s high and that it is the Federal Reserve's responsibility to reel it in to a manageable 2% per year.

The Fed's blunt instrument to accomplish this is raising interest rates.

So that's what Chair Jerome Powell and the other central bankers have done: raised rates.

Again and again.

All of a sudden, the financial decisions that seemed great and made lots of money when rates were low became major liabilities when rates began rising.

These rising rates will soak anything built in the interest-rate flood plane, like industries that relied cheap capital to get ahead (or even exist) like tech.

This is why Meta (META) and other tech companies are laying off so many people and talking about "efficiency" so much instead of "growth."

And Silicon Valley Bank found itself with a lot of these tech clients that were paring back.

After seeing deposits boom in 2021 and 2022, the bank was caught off guard in February when its tech clientele stopped depositing big wads of cash in the bank.

The company had also purchased tons of long-term bonds when rates were low. Now with rates much higher, those Treasuries were suddenly worth a lot less. When interest rates and yields go up, bond prices go down.

The losses Silicon Valley Bank took on its bond portfolio, along with the deposit outflows, were like two big holes in the side of the ship. As a result, the bank's credit rating was slashed.

Because the bank was focused on institutions, like startups and tech companies, it was more prone to a bank run as companies usually have a lot of uninsured deposits, i.e. any amount over the FDIC's insurance limit of $250,000.

Companies indeed got nervous and took their cash out, which tanked the stock as word got around.

A week ago, the bank failed and went into receivership with the FDIC in charge.

Not everyone got their cash out, but the FDIC said it would protect all depositors. Here's who was most exposed.

After the failure of Silicon Valley Bank — and crypto-focused Silvergate on March 8 — investors grew concerned about smaller regional banks, or other banks with a more niche clientele.

One bank, Signature, a New York regional bank, was seized by regulators on Sunday.

Like Silvergate, Signature it was a real estate-focused bank that had gotten into crypto and with deposits down 17% in Q4 had a weak balance sheet.

Silicon Valley Bank and Signature are the second- and third-largest bank failures ever.

However, many are eager to point out that they're small and niche.

Large bank stocks are faring a little better and the regional bank stocks, as we can see in the chart below which compared the KRE ETF that tracks regional to the KBE ETF that tracks larger banks.

Here's SVB and First Republic compared to the big banks.

First Republic, which had taken the biggest hit in the market, was saved (as of publication) when an Avengers-esque line up of 11 banks including A-listers JPMorgan, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley deposited $30 billion to right the ship.

As we head into the second weekend of this crisis, we don't yet know where this ends or what other banks might face a similar fate.

But the dynamics that caused this collapse — rising rates to crush inflation — may expose other structures that were not built with adequate protections over the last few decades, something BlackRock's Larry Fink is worried about.

On the other hand, the drama in the markets that this banking industry mess has created has reduced the likelihood of further rate hikes, which were very much expected. Perhaps a roundabout way for stock investors to calm their nerves.

As Apollo's Torsten Sløk wrote in a note on Wednesday: "With the regional banks playing a key role in US credit extension, the Fed will not raise interest rates next week, and we have likely seen the peak in both short and long rates during this cycle."

Correction 3/17/2023: In one of the graphics above, an incorrect logo for a different bank was used next to the listing for the Guaranty Bank that failed in 2009. This has been corrected.

What to Watch Today

Economy

• Industrial production, February (+0.4% expected vs. 0% in January)

• University of Michigan consumer sentiment, preliminary March reading

Earnings

• No notable earnings set for release.

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