Are we in the foothills of the next banking crisis? Quite possibly. Investor sentiment remained fragile on Friday despite massive rescue for the banking sector, leaving global equities under pressure while gold prices were poised for their largest one-week rally since March 2020.
The U.S. banking crisis began after two mid-sized lenders — Silicon Valley Bank and Signature Bank— were rescued by the Federal Deposit Insurance Corp last week as depositors yanked billions of dollars from them after fearing about their solvency. Silicon Valley eventually filed for bankruptcy protection over the past 24 hours. A third bank, First Republic, is also in trouble despite receiving a $30 billion cash infusion from a consortium of banks.
SVB Financial Group announced it would seek Chapter 11 bankruptcy protection, the latest development in an ongoing drama that began last week with the collapse of Silicon Valley Bank and Signature Bank which sparked fears of contagion throughout the global banking system.
On Friday, investors lost confidence in U.S. regional banks and Credit Suisse in Europe. Risk appetite waned after showing signs of recovery on Thursday. Credit Suisse’s chief executive said on Friday the bank was working hard to stem customer outflows, although this could take time. Credit Suisse shares resumed their decline.
Fed data on Thursday showed banks sought record amounts of emergency liquidity in recent days, which helped undo months of central bank effort to shrink the size of its balance sheet. Its latest discount window borrowing has further seen banks take $150 billion, which makes for a new record even topping the 2008 GFC.
“Last week the Fed’s balance sheet swelled by $300 billion, wiping out 4 months of QT in one week,” gold bug Peter Schiff wrote in part of a Twitter reaction. “By the end of the month the balance sheet could reach a new high. Rate hikes don’t matter. Inflation is headed much higher, thanks to bank bailouts.”
Markets are pricing in a 25 bps increase by the U.S. Federal Reserve when it meets next week, down from previous expectations for a 50 bps increase. At last glance, financial markets have priced in a 60.5% likelihood that the central bank will raise its key target rate by 25 basis points, and a 39.5% probability that it will let the current rate stand.
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