Topline
Stocks rallied Tuesday as the federal government moved to instill confidence in the nation’s wobbly banking sector, but a new Bank of America survey reveals investor concerns about market risks have surpassed levels last seen during the Great Recession.
Treasury Secretary Janet Yellen sought to calm the latest concerns about the country’s financial … [+]
Key Facts
Treasury Secretary Janet Yellen said in prepared remarks Tuesday that government intervention could be “warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Yellen’s comments, coupled with a Bloomberg report indicating officials are considering expanding the scope of Federal Deposit Insurance Corporation protection, inspired a rally for bank stocks, with First Republic’s 31% gain in early trading leading a broad regional bank stock rally and large-cap bank stocks similarly rallying.
In turn, the Dow Jones Industrial Average rose 0.7%, or 220 points, building on Monday’s 314-point gain, while the S&P 500 and Nasdaq also tacked on 0.7% apiece.
But the surge in optimism comes shortly after the release of Bank of America’s latest monthly investment fund manager survey revealing just how deep the banking crisis has cut among top investors.
The bank’s survey of 212 managers overseeing $548 billion in assets revealed investor perception of market risk cratered more than 20% from February to March, surpassing managers’ risk level amid the depths of the Great Recession.
Perhaps most jarringly, worries about a “systemic credit event” became the top event threatening a major shock to markets among managers polled last month, surpassing lingering inflation, geopolitical risks and more stringent monetary policy.
Crucial Quote
“This is different from 2008,” Yellen said at a banking industry conference Tuesday. “2008 was a solvency crisis; rather what we’re seeing are contagious bank runs.”
Key Background
In less than two weeks this month, crypto-bank Silvergate Capital closed, startup lender Silicon Valley Bank and New York-based Signature Bank failed and one-time Swiss behemoth Credit Suisse was sold to UBS for pennies on the dollar. Yellen and other Biden Administration officials said they would step in to safeguard uninsured deposits at Signature and Silicon Valley Banks, and threw their weight behind a $30 billion plan for big banks to shore up First Republic. U.S. bank stocks are down tremendously this month, with the 10 largest losing some $275 billion in market value through Friday.
What To Watch For
The Federal Reserve will reveal Wednesday at 2 p.m. ET if it will hike interest rates further as it seeks to rein in inflation by making borrowing more expensive. Futures markets price another 25 basis point hike as the most likely scenario at 82%, according to the CME Fedwatch Tool, while a pause has an 18% likelihood. “The Fed is facing a difficult task on Wednesday, but it is likely already past the point of no return – a soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending),” JPMorgan analysts led by Marko Kolanovic wrote in a Monday evening note to clients.
Further Reading
Treasury Explores Emergency Powers To Expand FDIC Coverage Amid Contagion Concerns, Report Says (Forbes)
First Republic Shares Crater To All-Time Low As Bank Reportedly Taps JPMorgan To Explore Possible Sale (Forbes)
10 Numbers And Charts That Sum Up March’s Banking Fiasco (Forbes)
Source: https://www.forbes.com/sites/dereksaul/2023/03/21/yellen-testifies-banking-crisis-different-from-2008-but-fund-managers-worry-systemic-debt-risk-could-crash-market/