All eyes in the market have turned towards a banking sector in crisis over the last week, from Silvergate Capital and Silicon Valley Bank’s (SVB) early troubles to recent concern for U.S.-based First Republic Bank (FRC) and Switzerland-based Credit Suisse. For investors and advisors looking for signals in the noise to understand the situation better, there are a few key banking indicators to understand the current crisis, according to a recent analysis from Harbor Capital Advisors.
Speaking on a webinar for investors at market close on Wednesday, March 15th, 2023, moderated by the firm’s president, Kristof Gleich, Harbor’s head of multi-asset solutions, Spenser Lerner, and portfolio manager Jake Schurmeier identified the data points they’re looking for to understand the bank crisis.
One such indicator is H8 data from the Federal Reserve. This weekly data point measures the aggregate amount of deposits broken out by the number of deposits owned by those banks. That could help market watchers see whether the bank run contagion that impacted SVB has spread to regional banks.
“If I had to pick one indicator that I wanted to see that’s fairly high frequency, that’s going to be it because, at the end of the day, what this crisis has evolved into is a crisis of confidence for depositors,” Lerner said. “And we need to see if underlying depositors, regular Joe Schmo and Jane Shmane, individuals and small business owners if they’re shifting their deposits away from smaller regional banks and moving them to bigger, safer banks.”
Lerner added that he believes that credit default swap spreads1 can also indicate how much stress is being placed on banks while funding stress measures that are very particular to banks, like the cross-currency basis, or measure of the relative shortage of a certain currency in the market relative to its demand, and the actual Fed funds trading rate.
Among other key banking indicators is the H.4.1 report set to be released by the Fed on Thursday, March 16th, 2023, detailing how much banks have drawn on a relatively new Fed program, the Bank Term Funding Program (BTFP). The BTFP was unveiled last weekend to offer loans of up to a year of maturity to banks, credit unions, and other depositary institutions to help deter the banking contagion issue.
A recession that some had expected to happen later this year looks more likely to be pulled forward this year, Lerner said if the bank crisis spreads to the broader economy by a transmission mechanism like lending. In such a scenario, banks worried about their balance sheets going under the microscope might freeze lending, with regional banks, a key source of lending to small and mid-sized firms that employ about 80% of the labor force, a pivotal vector to the broader economy.
For investors and advisors looking to understand the bank crisis, those key bank indicators are ones to watch Thursday, March 16th, 2023, and Friday, March 17th, 2023, as managers and experts at Harbor Capital Advisors continue to assess the situation.
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1 The credit default swap (CDS) is a type of credit derivative product. Credit derivatives provide transferring credit risk, which is the possibility that one of the contract parties will not be able to fulfill his obligations from one contractor to another one. Accordingly, credit derivatives are the tools that help banks, financial institutions, and investors manage this risk. For example, if a debtor cannot pay the debts, losses will occur on the investments, and these losses can be compensated by credit derivatives. Banks and investors prefer credit derivatives over insurance contracts because of their low transaction costs, quick payments, and more liquidity. Within this context, CDS could be considered an insurance transaction that is made to guarantee the receivable of the creditor. The cost of this insurance is the spread determined by the CDS rates.
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.
This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.
Performance data shown represents past performance and is no guarantee of future results.
Investing entails risks, and there can be no assurance that any investment will achieve profits or avoid incurring losses.
This article was prepared as Harbor Funds paid sponsorship with VettaFI.
Harbor Capital Advisors, Inc.