What originally started as a run on regional banks in the U.S. has continued to escalate, with a banking crisis unfolding across the world.
As trading is expected to continue to be volatile this week, Harbor Capital Advisors hosted a webinar before the market opened on Monday, March 20, 2023, on the unfolding banking crisis, helping advisors understand what the latest announcements and developments mean and how events may unfold from here over the coming days and weeks ahead.
Since Harbor’s previous webinar on Thursday, there was a coalition of 11 banks that put $30 billion of short-term deposits into the First Republic as a sign of support. However, this was a liquidity injection and not a capital infusion and so far has largely failed to convince markets that have gone far enough, Kristof Gleich, Harbor president and CIO, said during Monday’s webinar.
“Later, on Thursday, we saw details emerge of a record $156 billion tapping of the Fed discount window, and then over the weekend, and especially last night, the news continued to come in thick and fast,” Gleich said. “Most newsworthy was UBS, in conjunction with heavy state support by various capital provisions and liquidity lines has effectively bailed out Credit Suisse, a bank that had been around since 1856. Controversially, all 81 bondholders or CoCo bondholders have been wiped out. That’s 17 billion of bonds that have gone to zero that was recently as a month ago marked at 90 cents on the dollar. So this is causing some turmoil today in the markets.”
Gleich said regulators across the world largely supported this bailout in Switzerland. There was also a confirmed and coordinated response by six central banks, including the Fed, the Bank of England, the Bank of Japan, and the European Central Bank, announcing increased coordination on dollar swap lines to ensure ample liquidity dollar liquidity in the banking system.
“Just finishing up, according to Bloomberg, there was a report that a letter has been sent by the Coalition of mid-sized U.S. banks to federal regulators, asking to extend FDIC insurance to all depositors for a term of two years, citing that it’s imperative that we restore confidence into the system,” Gleich said. “This letter was followed last night by the second downgrade in a matter of days from S&P Global of the First Republic Bank, which is now firmly in junk territory with a bond rating of B+.”
Andrew Tucker, portfolio manager and research analyst at Jennison Associates, said this is a test of the confidence in our banking system — a potential crisis after the failure of U.S. banks and Credit Suisse last night.
“Each of the U.S. banks had two common things,” Tucker said. “First, an unstable deposit base with a high portion of commercial uninsured deposits. If you look at Silicon Valley, they cater to the venture capital funds of Silicon Valley and industry controlled by maybe 50 or 100 funds, and 97% of their deposits are uninsured. So when they announced their troubles, the sophisticated venture capital funds knew their deposits were uninsured, and the deposits just simply vanished with $40 billion going in a day.”
“Second common denominator among the failed banks, they had a large mark to market losses on their bond investment portfolios,” Tucker said. “Only the six largest banks in the country have to mark their investments to market for the regulator’s capital adequacy tests, so Silicon Valley signature didn’t have to mark their losses to market for the capital adequacy test.”
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Swap lines are agreements between central banks to exchange their countries’ currencies with one another.
The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice. The information provided in this presentation is for informational purposes only.
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Harbor Capital Advisors, Inc.