Marketmind: Banks Are Leaking Money

A look at the day ahead in European and global markets from Wayne Cole

It’s been a quiet Monday so far with Asian share markets mixed but U.S. and European stock futures higher, perhaps because they got through a weekend without another bank collapsing.

There is some relief that First Citizens BancShares Inc is in advanced talks to acquire Silicon Valley Bank. There was also some talk the Federal Reserve could expand its new lending programme for banks as another step to reassuring depositors.

Money is clearly flowing out of smaller banks toward their bigger siblings and to money market funds, which have seen an inflow of more than $300 billion in the past month to a record $5.1 trillion. BofA notes the prior two events like this in 2008 and 2020 were followed by Fed rate cuts.

Fund futures now show an 88% chance the Fed stands pat in May, while a July cut is priced at better than 90%.

Deposits at small banks fell by $120 billion in the week to March 15, while borrowing jumped $253 billion and presumably much of that was from the Fed.

Capital Economics points out that deposits across all the banks have fallen by $663 billion in the past year as customers search for higher yield.

“Unless banks are willing to jack up their deposit rates to prevent that flight, they will eventually have to rein in the size of their loan portfolios, with the resulting squeeze on economic activity another reason to expect a recession is coming soon,” they warn.

European banks face similar strains, with the added speculative stress on Deutsche Bank and a general jump in the cost of credit default swaps. Deutsche Bank’s five-year CDS hit 222 bps on Friday, the highest since late 2018, while UBS CDS shot up to 139 bps.

Credit Suisse had to tap the Swiss National Bank for “a large multi-billion amount” to secure its liquidity. Not only were customers withdrawing money but counterparties were demanding guarantees to keep doing business, hardly an encouraging sign when interbank lending relies so much on trust.

Key developments that could influence markets on Monday:

– German IFO survey for March is seen around 91.0

– Bank of Spain´s Governor Pablo Hernandez de Cos delivers speech on economy. ECB Board members Frank Elderson and Isabel Schnabel speak, as does Andrew Bailey Governor of the Bank of England

– Federal Reserve Board Governor Philip Jefferson speaks on “Implementation and Transmission of Monetary Policy”

(Editing by Jacqueline Wong)