Bank Sector Chaos Highlights Deeper Regulatory Shortfalls, Crude Oil at New 15-month Low

Barry Adams
15 Mar, 2023
New York City

Financial markets tumbled and investors sought safety in government bonds after banking woes spread to Europe, adding to market jitters. 

Saudi National Bank, the largest investor in Credit Suisse, declined to inject additional liquidity to the troubled Swiss bank.  

The news drove European banks down as much as 15% and raised the prospect of a government bailout of the Swiss bank. 

Several bank stocks in Milan and Paris were halted after sellers overwhelmed buyers. 

Bank stocks have been under pressure over the concern of interest rate risks leading to deposit risks and forcing many institutions to raise capital at the time when stock prices are falling.  

The Federal Reserve has increased rates eight times over the last 12 months, upending the near zero-rate policy for more than a decade. 

Treasury securities held by banks have declined in value following the sustained increase in interest rates, and total unrealized losses at the yearend 2022 were about $620 billion across all U.S. banks.  

Rates are still rising in the U.S. and have a long way to go in the Euro Area, raising concerns that interest rate risks  may lead to deposit risks or spark wider bank runs that could turn even well capitalized banks insolvent. 

In New York, regional banks accelerated declines on Wednesday reversing the gains of the previous day as investors grappled to understand management actions separating capital held for the longer duration and the amount available to cover deposit outflows. 

Investors are also worried about the widening deficit in regulatory capacity in detecting fast emerging stresses in the banking system. 

Silicon Valley Bank would have passed the latest stress test conducted by the Federal Reserve that is required by the largest top tier banks. 

Bank runs enabled by online banking and fueled by social media messaging can overwhelm any bank regardless of its size. 

Silicon Valley Bank lost 25% of its deposit or $42 billion in less than 24 hours, the swift rate of deposit departure not possible in the pre-Internet and mobile banking era. 

 

Wholesale Inflation Eased In February 

Producer Price Index, a measure of wholesale inflation, seasonally adjusted declined 0.1% in February from the previous month, the U.S. Bureau of Labor Statistics said Wednesday. 

The core wholesale inflation,  less foods, energy, and trade services, increased 0.2% in  February after rising 0.5% in January. 

On an unadjusted basis, wholesale inflation rose 4.6% and core wholesale inflation increased 4.4% from a year ago. 

 

Retail Sales In February Edged Lower 

February retail and food services sales declined 0.4% from the previous month, the U.S. Census Bureau reported Wednesday. 

Retail and food services in the month rose 5.4% from the year ago and January sales data were revised to 3.2% increase. 

The monthly data are adjusted for seasonal variation and holiday and trading-day differences, but not for price changes. 

Retail trade sales were down 0.1% from January but increased 4.0% from a year ago. Food services and drinking places were up 15.3% while general merchandise stores were up 10.5% from last year.

 

Banks Dragged Stock Indexes Lower 

The S&P 500 index fell 0.7% to 3,891.93 and the Nasdaq Composite index increased 5.90 points to 11,434.05. 

 

Treasury Yields Inched Lower On Flight to Safety 

The yield on 2-year Treasury notes declined 33 basis points to 3.89%, 10-year Treasury notes eased 17 basis points to 3.46% and 30-year Treasury bonds dropped 11 basis points to 3.64%. 

 

U.S. Stock Movers 

Regional banks led the decliners today after rebounding in the previous session. 

PacWest Bancorp dropped 16% to $10.28, KeyCorp declined 2.8% to $11.82 and First Republic Bank fell 7.8% to $36.38 and Western Alliance Bancorporation increased 6.10% to $31.64. 

Credit Suisse Group AG plunged 23.5% to $2.08 after its largest investors Saudi National Bank refused to provide additional support to the troubled Swiss bank. 

Credit Suisse's woes added more pressure to already weak bank stocks and dragged down leading banks in Germany, France and Italy. 

BNP Paribas, Soicete Generale, Deutsche Bank and UniCredit declined between 7% and 10%. 

In New York, JPMorgan Chase, Bank of America, Wells Fargo and Citigroup fell between 3% and 5%. 

 

European Markets Dropped to One-year Lows 

European markets sank after banks plunged on the interest rate risks worries.

The latest market selloff was sparked by a 25% plunge in Credit Suisse after its largest shareholder declined to inject more liquidity into the troubled bank. 

A day ago the Swiss-bank confirmed "material weakness" in its financial reporting system and the bank is still struggling to complete its annual report.  

Several banks in France and Italy were halted after the morning selloff knocked many banks down as much as 12%. 

Deutsche Bank, UniCredit, BNP Paribas, Societe Generale and Banca Monte dei Paschi dropped between 8% and 11%. 

Silicon Valley Bank, once the 16th largest bank in the U.S. with $175 billion in deposits, would have passed the U.S. Federal Reserve's stress test determining financial fitness for the largest banks. 

“Our capital, our liquidity basis is very, very strong” and CEO Ulrich Koerner added in an interview with Reuters that  “we fulfill and overshoot basically all regulatory requirements.”

Not knowing what is ailing banks and what risks are lurking in balance sheets is adding to market anxieties.  

Woes of Credit Suisse are not new but the rising stress in bank stocks after the collapse of the Silicon Valley Bank and higher-rates-for-longer scenario is adding to the market anxieties. 

Markets were not convinced and Credit Suisse plunged as much as 30%. 

 

European Indexes Closed at One-year Lows

Stock market indexes dropped the most in a year as banking sector worries drove the market sentiment. After two hours of trading in Paris and Frankfurt benchmark indexes dropped to the low and struggled to rebound. 

The European Central Bank is set to lift its lending rate by 25 basis points after the policy meeting on Thursday. 

Higher rates are going to increase losses in government securities held by banks, stoking fears of the need to raise capital to bolster balance sheets. 

The DAX index dropped 3.3% to 14,735.26, the CAC-40 index declined 3.6% to 6,885.71 and the FTSE 100 index fell 3.8% to 7,344.45. 

 

European Government Bond Yields Turned Lower

European government bonds inched higher after investors sought safety of sovereign bonds on the rising risks of the banking crisis. 

The yield on 10-year German Bunds declined to 2.2%, French bonds eased to 2.73%, the UK gilts to 3.33% and Italian bonds to 4.13%. 

The euro declined 1.9% against the dollar, its worst one-day decline since March 19, 2020 when the currency fell 2.04%. 

The euro edged lower to $1.0508, the British pound fell to $1.207 and the Swiss franc eased to 92.80 cents. 

 

Crude Oil Traded at New 15-month Lows

Crude oil traded at a new 15-month low on rising stress in the banking sector and worries spilled over to Europe. 

Prices fell despite OPEC and the International Energy Agency revised higher their estimates of demand growth from China. 

Saudi Arabia energy minister Prince Abdulaziz bin Salman said OPEC would stick to its production cuts agreed in October till the yearend. 

Brent crude oil prices declined 4.4% to $74.11 a barrel and the Dutch TTF natural gas spot price fell 3% to Є42.90 per MWh. 

In New York, crude oil declined 4.1% to $68.25 a barrel and natural gas fell 10 cents to $2.46 a thermal unit. 

 

Europe Movers 

Ferrexpo Plc declined 7% to 122.0 pence after the Swiss commodities trading and mining company reported a decline in profit in 2022. 

IG Group Holdings plc dropped 9.9% to 695.50 pence after the online trading company reported third quarter revenue fell 7% on lower market volatility. 

Industria de Diseno Textil SA, parent of Zara, declined 5.1% to €27.68 despite the fashion and apparel retailer reporting record net income in 2022. 

Burberry Group Plc declined 3.7% to 2,245.46 and the luxury fashion group appointed Kate Ferry as chief financial officer, replacing Julie Brown who had announced her decision to step down in September 2022. 

Kate Ferry currently serves as chief financial officer of McLaren Group. 

Lanxess AG plunged 11.3% to €34.85 after the German specialty chemical company swung to a loss in fourth quarter €21 million compared to a profit of €29 million a year ago. 

 E.ON increased 0.5% to €10.38 after the Germany-based utility company said sales and adjusted profit increased in full-year 2022. 

BMW AG declined 1% to €94.69 and the vehicle maker estimated operating earnings margin between 8% and 10% in 2023. 

The company also confirmed its 2022 results and said vehicle sales declined 4.8% to 2.4 million from 2.5 million a year ago.