US banking crisis – what now?

What happened over the weekend?
US regulators stepped in to take over collapsed banks Silicon Valley (SVB) and Silvergate, and announced that depositors would be protected. Simultaneously, it also announced a new Bank Term Funding Program (BTFP) that would provide liquidity for any bank in need of it.

Does this stop the crisis?
Potentially. It means that the risk of a bank run has been greatly reduced, but as early trading on Monday shows it looks like other regional US banks are still at risk of heavy losses in their stock prices. Big banks appear to be the safe haven, with money likely flowing to these and away from smaller firms.

What does this mean for the Federal Reserve?
Goldman Sachs has already come out to say that it does not expect a rate hike at the March meeting of the Federal Reserve. Analysts have argued that the bank crisis is revealing the stresses imposed on the system by the move from ultra-low interest rates, and to push on with rate increases will only increase the pressure and run the risk of further bank crises, while simultaneously increasing the risk of a recession.

Others, however, have said that the new support programme for banks may allow the Fed, over time, to actually go higher in terms of its terminal interest rates (i.e. how high they go before pausing), since it removes or reduces the problems experienced by SVB for other banks. Nonetheless, a pause may still happen at the March meeting in order to allow volatility to subside and reduce the stresses on the system.

What is the impact on markets?
Initial gains for futures markets in the US and Europe seemed to suggest investors were relieved that the Fed had stepped in. But losses have returned as the cash session got underway, sparked by big drops for the stock prices of other US banks.

Fears of a fresh banking crisis will of course provide a reason for stock markets to keep dropping. For European indices this means more of the gains from Q4 last year could disappear, while US indices could be in for a retest of last year’s lows, and potentially even further than this.

Safe-haven demand will likely boost the US dollar, though with many analysts expecting the Fed to pause its tightening efforts in March (and possibly beyond), the greenback might struggle in the short-term.

Much depends on whether the crisis expands beyond banks, and turns into a general risk-off move. This would then engulf most assets, and even gold might not be immune if the dollar strengthens.