Our view on the current crisis is that bank shares are being sold off too hard and will bounce back, and the 2-yr. note yield may see 5% again before this rate cycle is over with.
The chart below shows the iShares BNKS ETF (UCITS, USD) as a proxy for US bank shares. The top holdings are Citi, Wells Fargo, JP Morgan, Bank of America, PNC Financial, Truist Financial, US Bancorp, Fifth Third Bancorp, M&T Bank and First Republic, making up over 50% of the weight in the ETF. The ETF is down over -40% from the early 2022 peak, and is hammering away at the 61.8% retracement of the rally from the 2020 low
The key question for investors is will the ETF drop to the 76.4% retracement near $3.7? Or lower? Or is this ‘it’ for the sell off?
On the face of it I would hope that Treasury Secretary Yellen knocking heads together over the weekend should address some of the risks. The Fed created a new emergency lending plan with a funny acronym, Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and others who can put their Treasuries, agency debt, mortgage-backed securities and other qualifying paper in a wheelbarrow and haul it to the Fed’s borrowing window and the Fed will value this paper at par!
The Fed needs to make it clear that these loans won’t cost a lot, and that there is no ‘walk of shame’ in using it. They may need to go back to the TARP process and force all banks to use the facility in order to get the ones that need to use it to actually do this. The Fed may also want to raise the current $25 bn that is allocated to this lending facility and add a few zero’s to the figure, just to stop speculators from thinking that this is not big enough.
So why are bankers pretty much universally hated? In good times they pay themselves big bonuses and party like drunken sailors. In bad times they get bailed out, maybe not directly, but they do.
The Fed’s new lending program may have lipstick on it, but it is a bailout of depositors in some banks. This is not necessarily a bad thing, given how the banking system runs on confidence and if we didn’t have a banking system then things get sticky. But, the roll-back of some US regulatory scrutiny in 2018 for smaller banks apparently had some consequences. If the problem is that banks have too much money on deposit and fudged it all up by going long duration and running naked risk, then one would hope that the Fed and other regulators will pencil in the notion that ‘risk officers and committees need to take tests showing a bare minimum knowledge of what do to in a rising rate environment’ in the future.
Hint: Don’t buy bonds and hope that they don’t lose money as the Fed raises rates.
Keywords: banks, Fed