Market Comment - March

Volatility picked up in March, as the market witnessed two bank runs that did not bode well for risky assets. The failure of Silicon Valley Bank and Credit Suisse spooked markets, and the trouble at those two financial institutions was quite exceptional. SVB Financial Group’s customers withdrew USD 42 billion from their accounts in one single day. That's USD 4.2 billion an hour, or more than USD 1 million per second for ten hours straight. It resulted in the biggest bank run in US history. In the case of Credit Suisse, we currently don’t know the exact numbers. While the source of trouble resulting in a bank run is usually a lack of confidence by depositors, the failure of SVB Financial Group is the result of clients realizing that they can earn more interest in the money market than on deposit accounts in the bank.

Meanwhile, the National Bureau of Economic Research in the US reported that the U.S. banking system’s market value of assets is USD 2 trillion lower than suggested by their book value of assets. If held to maturity, those losses are not relevant, but if a bank needs an excessive amount of liquidity, those losses have to be realized. To avoid this, the Fed opened the Bank Term Funding Program, as well as the Discount Window Lending, where banks receive liquidity for the full amount of the bonds held on the balance sheet. Unfortunately, interest rates to be paid on those loans are 5.00%. A bank using those programs will face exploding interest rate costs. The program can keep a bank from going bankrupt immediately, but it moves it to a Zombie Bank. The Fed has prevented a bank run from spreading, but there is a systemic problem within small banks, revealed by the recent events.

Regional banks have only 29.00% of cash and securities available for the funding programs. Loans make up 65.00% of assets, and those loan portfolios are loaded with commercial real estate credits. CRE credits are currently what worries Wall Street. If clients continue to remove deposits from regional banks, the odds are high that we will see more bank failures this year, revealing the true value of CRE credits. The collateral at large banks has higher quality, and credit portfolios are safer. While there is no life-threatening situation in the US for large banks, profitability will certainly suffer.

The uncertainty emerging from the events described above has led to a massive drop in interest rates for Treasury bonds. Lower interest rates, coupled with the liquidity injection from the central bank, have led investors back into risky assets, especially so-called “long duration assets,” which can be mostly found in the Nasdaq index. While the Russell 2000 lost 4.81% during the month of March, the Nasdaq 100 gained 9.25%. Equity markets could again profit from strong seasonality for the next couple of weeks, while riding the wave of pent-up demand, which is coming to an end.