Has the Bank Crisis Really Been Solved?
After conversing with our Chief Economist Don Rissmiller yesterday about the status of the banking system, the question came up about whether the risk of deposit flight still remains. Commercial bank deposits, which yield next to nothing, have fallen by roughly -$571 bn while money market mutual funds, which yield closer to 4%, have taken in +$456 bn since the hiking cycle started. With the ability to move money by the click of a button, the search for deposits seeking higher yields, and ultimately the risk of deposit flights, will likely continue.
Current Nasdaq Rally an Outlier Following Major Financial Events
Looking at performance for both the S&P 500 and Nasdaq following major global financial events shows that on average the S&P 500 falls by -1.1% in the two weeks following the event and the Nasdaq falls by -5.2%. Furthermore, the Nasdaq has traded negative every single time except one. The +6% rally in the Nasdaq since the collapse of SVB is the outlier.
Bank Failures by Assets Not Above GFC Levels
From a cumulative bank asset standpoint, we are approaching GFC levels in regards to bank failures. With that said, the number of bank failures YTD in ’23 stands at 2 thus far, paling in comparison to ’08 where 25 bank failures took place. It should be noted that more bank failures actually took place in ’09 (140) although the cumulative assets of said banks ($170 bn) was less than what transpired in ’08 ($373 bn).
Can't Say the Same from a Deposit Standpoint Though
However, from a cumulative deposit standpoint we are above ’08 levels. The asset-liability mismatches are well telegraphed to investors at this point but recent commentary from Treasury Secretary Yellen in which she dismissed the idea of blanket depositor insurance warrants the question of just how safe deposits are in the regional banking sector moving forward? At the very least, more prudent asset-liability management will likely lead to lower profits in the near-term.