Global Investors Anticipate More U.S. Government Backstopping In Banking Sector

Barry Adams
27 Mar, 2023
New York City

Stocks attempted to rebound on the first day of a new week and investors searched for good news as the U.S. financial regulators and Treasury officials offered a familiar solution to the fast moving regional banking crisis. 

Federal officials are looking for ways to provide additional liquidity to the banking system and hunt for ways to stem the crisis from spreading further into the banking system. 

The Federal Deposit Insurance Corporation managed to sell only about 40% of the total assets of the former Silicon Valley Bank for about 25% of its nominal value and entered into a loss sharing arrangement with the acquiring bank First Citizen BancShares. 

The FDIC said for now losses stemming from saving Silicon Valley Bank stand at $20 billion and the cost is likely to rise if assets held in the receivership are sold at a larger discount. 

The Deposit Insurance Fund had $128.2 billion to insure a total deposit of $17.7 trillion across all 7,738 FDIC insured and supervised banks, according to the fourth quarter 2022 report released by the agency. 

In other words, the FDIC is insuring deposit with only 0.7% of funds in its account.   

U.S. Treasury officials and bank regulators have managed to calm markets for now, but larger losses are looming in Treasury securities holdings at banks of all sizes as interest rates keep going higher. 

Higher interest rates decrease the value of the Treasury securities, as bond prices adjust to lower values reflecting higher yields. 

On Monday, stock investors overlooked stress in the banking sector but bond yields and crude oil prices closed higher. 

 

U.S. Indexes & Yields 

higher bond yields dragged tech stocks lower but broader market indexes closed up. 

The S&P 500 index increased 6.53 points to 3,977.53 and the Nasdaq Composite index declined 55.12 points or 0.5% to 11,768.84. 

The yield on 2-year Treasury notes increased 23 basis points to 4.01%, 10-year Treasury notes inched up 16 points to 3.53% and 30-year Treasury bonds 12 basis points to 3.77%. 

Gold edged down $20.32 to $1,956.99 an ounce, after trading at a one-year high of $2,000. 

Crude oil increased $3.61 to $72.81 a barrel and natural gas futures declined 11 cents to $2.09 a thermal unit. 

 

US Movers

First Citizens BancShares Inc soared 47% to $854.49 after the North Carolina-based bank agreed to acquire Silicon Valley Bank's assets from the FDIC. 

First Citizens agreed to pay $16.5 billion for $72 billion of assets (or loan portfolio), own and operate 17 branches of the former bank, the FDIC said in a statement. 

The FDIC will retain $90 billion of assets of the now defunct Silicon Valley Bank and the agency received stock appreciation rights potentially worth $500 million in the First Citizens BancShares, Inc.  

The FDIC-controlled Silicon Valley Bank Bridge Bank, National Association will reopen as First-Citizen Bank & Trust Company, a wholly-owned subsidiary of First Citizens BancShares.  

 The FDIC estimated the cost of the failure of Silicon Valley Bank to be approximately $20 billion and the exact cost will be determined once the receivership is terminated. 

The FDIC and First–Citizens Bank & Trust Company entered into a loss–share transaction on the commercial loans it purchased from the former Silicon Valley Bridge Bank, National Association.  

The FDIC as receiver and First–Citizens Bank & Trust Company will share in the losses and potential recoveries on the loans covered by the loss–share agreement.

First Republic Bank jumped 14% and PacWest Bancorp advanced 4% after Bloomberg News reported that the U.S. government is looking to provide additional liquidity to regional banks as the government and agencies search for a buyer for Firth Republic Bank.  

 

European Markets Look Beyond Current Turmoil In Banks 

 

European market indexes advanced after the U.S. bank worries eased and investors shifted focus to domestic economic and corporate news. 

Stocks traded  higher after Germany's business confidence unexpectedly improved and investors overlooked slowing credit growth. 

With the full effect of higher interest rates still not felt by the economy, economic slowdown may be approaching faster than previously expected. 

On Monday, investors focused on the receding banking worries and rising confidence in the German business community. 

 

Eurozone Private Lending Growth Slowed In February 

Eurozone private lending rose at the slowest pace in February, reflecting higher interest rates and weak credit demand, the European Central Bank reported Monday. 

Private sector lending increase slowed to an annual growth rate of 3.3% in February from 3.8% in January. 

M1 money supply, which includes currency in circulation and overnight deposits, declined 2.7% in February, a faster pace than the decrease of 0.8% in January. 

M3 money supply, a wider measure of money in circulation, rose at a slower annual pace of 2.9% from 3.5% in January. 

 

German Business Climate Index Improved In March 

The business climate index increased to 93.3 in March from 91.1 in February, the Ifo Institute reported Monday. 

The index increased for the fifth month in a row after current situation and expectations indexes improved. 

The current situation indicator increased more-than-expected to 95.4 in March from 93.9 in the previous month and the expectations index increased to 91.2 from 88.4 respectively. 

"Despite turbulence at some international banks, the German economy is stabilizing." said Clemens Fuest, president of the ifo Institute. 

In manufacturing, the index rose substantially and companies were more satisfied with their current business situation. Moreover, pessimism almost completely disappeared from their expectations.

 Sentiment improved considerably, especially  in key areas of manufacturing such as the automotive, chemical, electrical and electronics, and machinery and equipment  industries. 

 

Europe Indexes & Yields 

The DAX index increased 1.1% to 15,127.68, the CAC-40 index added 0.9% to 7,078.27 and the FTSE 100 index advanced 0.9% to 7,471.77. 

The yield on 10-year German Bunds edged higher to 2.26%, French bonds rose to 2.76% and the UK gilts to 3.38% and Italian bonds to 4.08%. 

The euro edged up to $1.078, the British pound inched higher $1.22 and the Swiss franc to 91.63 cents. 

Brent crude oil added $2.98 to $77.98 a barrel and the Dutch TTF natural gas price rose Є1.42 to Є42.53 a MWh. 

 

Europe Movers

Deutsche Bank AG increased 6.2% to €9.07 after German Chancellor Olaf Scholz rejected comparison with Credit Suisse and said that Germany's largest bank is "profitable" and there is no "reason to be concerned."

The comments lifted stocks of other peers in the region. 

Commerzbank, BNP Paribas, Barclays and UniCredit jumped between 1% and 3%.  

Salzgitter AG soared 6.9% to €33.54 after the steelmaker forecasted better-than-expected profit in 2023. 

Novartis AG advanced 8.4% to $90.55 after the Swiss drug maker reported positive results for its breast cancer trial drug Kisqali. 

"The Independent Data Monitoring Committee recommended stopping the trial early as the primary endpoint of invasive disease-free survival has been met," the company said in a statement released to investors.