May 02, 2023
🎦 Good morning! Another busy news day is upon us: Hollywood writers are on strike for the first time in 15 years, and we're counting down the hours until Jerome Powell's presser tomorrow.
Today's newsletter is 1,214 words, 5 minutes.
1 big thing: Not over yet
If you were looking for a huge sigh of relief from the markets after the sale of large chunks of First Republic Bank to JPMorgan yesterday, you were disappointed, Matt writes.
State of play: Financial markets gave mixed reviews to the government-aided purchase of parts of the failed San Francisco-based bank, which specialized in high-touch service for the wealthy.
- Regional bank shares continued to sell off with the S&P 500 regional banking index down 3.4%. The KBW banking index, another closely watched bank index, was off by 1.8%.
- Larger regional banks such as Citizens Financial and PNC — both of which were in the hunt to buy First Republic — fell more than 6%, suggesting some investor disappointment that they weren't allowed to devour bits of First Republic's carcass.
Meanwhile, JPMorgan and other banking giants like Wells Fargo and Citigroup rose, an indication investors continue to draw a distinction between the biggest banks — perceived to have implied backing from the government — and everyone else.
Details: The market seems to view the resolution of First Republic not as a sign that the banking panic is over, but as a reason to keep sniffing out other — though perhaps smaller — weak spots in the system.
- New Jersey's Valley National Bank came under scrutiny, as its shares tumbled 20%, its worst daily drop ever. The bank, which has a large share of investments in the commercial real estate sector, was downgraded by an analyst who cited rising deposit costs as a threat to profitability.
- Los Angeles' PacWest Bancorp — which disclosed deposit outflows during the initial phase of the bank panic in March, but since said deposits had resumed growing — tumbled by nearly 11%.
- Seattle-based commercial and real estate lender HomeStreet Inc., dove 18%.
To be sure, these banks are tiny compared to First Republic and Silicon Valley Bank.
What they're saying: "Emergency lending to the domestic banking system remains elevated," analysts with BofA Securities wrote late last week. "Regional bank stress may not be getting worse, but it may not be getting better either."
- In theory, that number should fall in the coming week, as some part of those Fed loans were helping First Republic limp along. But we'll have to wait and see.
The bottom line: Judging by the reaction of the markets and the large level of help the Fed was still offering to the banking system, at least until recently, it seems a bit early to sound the all-clear.
2. Catch up quick
3. The math of banking the rich
Is banking the rich a good business to be in? The obvious answer is yes — they have the money, after all.
- But the failure of First Republic Bank, which catered to the ultra-wealthy, has some observers speculating that the golden days of relationship banking are over, Axios' Felix Salmon writes.
Why it matters: For years, bankers to the rich have made money from a simple compact: Depositors are happy to overlook miserly deposit rates if they get excellent service.
Where it stands: That compact might be falling apart. When interest rates were at 0.25%, a millionaire would forego $2,500 a year in interest by putting $1 million on deposit in a no-interest checking account — not an outrageous amount to pay for great service and perfect discretion.
- Once rates rise to 5%, however, that opportunity cost rises to $50,000 per year, which starts to feel like real money.
- On top of that, money-market funds and Treasury bills are safer than uninsured deposits.
The big picture: Wealth management services remain a great high-touch business to be in, and most big wealth managers want to be able to offer a full suite of services, including checking.
- High-touch checking without wealth management, however, is a much more expensive business for banks to be in, especially once customers start shopping around for decent interest rates.
The bottom line: In banking, as in almost all other aspects of the economy, high-end service has been getting much more expensive in recent decades.
4. FDIC proposes changes
In the wake of three major bank failures, the Federal Deposit Insurance Corporation released a report yesterday afternoon with recommendations for reforming the way the nation's deposit insurance system works, Emily writes.
Why it matters: The amount of bank deposits that aren't covered by FDIC insurance has grown rapidly and is now higher than at any point since 1949.
- The fast rise in uninsured bank deposits (with balances of more than $250,000) poses a systemic risk to the financial system because it increases the risk of bank runs, FDIC officials said in a call with reporters.
The big picture: All three of the bank failures in the U.S. this year happened at financial institutions with a large percentage of uninsured deposits.
By the numbers: Uninsured domestic deposits increased at a rate of 9.8% a year to $7.7 trillion, from 2009 to year-end 2022, the FDIC wrote.
- At their peak in 2021, 47% of domestic deposits were uninsured, and they were held in just a few large banks — even though the percentage came down in 2022, it was still historically high.
- Banks in the top 1% by asset size held 77% of uninsured deposits at year-end 2022.
Zoom in: The FDIC report doesn't outright say that the nation's deposit insurance needs an update. But on the call, officials acknowledged that something should change if the goal is financial stability.
The report offers three suggestions, including lifting the deposit limit altogether, but recommends just one of them: Create targeted business bank accounts that are insured even if they're over the limit.
- This would allow companies to have big accounts for transactions like meeting payroll. One of the big worries in the collapse of Silicon Valley Bank was that a failure would mean the employees of many many businesses wouldn't be paid.
- A similar structure was in place for a time in the wake of the financial crisis.
5. End of a hiking era
When the Federal Open Market Committee meeting begins today, it could signal the end of this era of rate hiking, Axios’ Kate Marino writes.
Why it matters: To oversimplify a bit, the Fed's historic rate hiking campaign that started at the beginning of last year helped crush the markets' performance: The S&P 500 gained 27% in 2021, then shed 19% in 2022.
The big picture: Inflation has cooled, there’s no wage-price spiral, and credit has tightened. Analysts whose livelihood is anticipating Fed moves are increasingly ready to call the pause.
Here’s a sampling from Friday:
- “We expect the Fed to hike by 25bp at next week's meeting. More importantly, we think the Fed will signal a pause in June,” wrote analysts at BofA Research.
- Credit Suisse analysts also expect a quarter-point hike; they think it’ll “likely be the final hike in this cycle, and we expect Chair Powell to signal that the Fed expects to pause at this level for some time.
- “While some policymakers will likely favor ongoing rate hikes beyond May, we believe a consensus will be formed around a ‘pause and hold’ strategy,” wrote EY chief economist Gregory Daco in a note.
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Axios Markets is edited by Javier David and copy edited by Mickey Meece.