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First Citizens bank agreed to buy Silicon Valley Bank's deposits and loans, suggesting there is still confidence in the U.S. banking sector.
What you need to know today
- First Citizens Bank will buy Silicon Valley Bank's deposits and loans, the U.S. Federal Deposit Insurance Corporation announced Monday. As part of the agreement, First Citizens Bank will enter a loss-share agreement with the FDIC for SVB's commercial loans, according to the FDIC's press release.
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- Customers in the U.S. withdrew a collective $98.4 billion — or about 0.6% of total deposits — from banks for the week ended March 15, according to Federal Reserve data. Smaller banks saw outflows of $120 billion, while larger institutions saw deposits increase by $67 billion — though the movement from smaller banks to bigger ones has slowed in recent days, sources told CNBC.
- Despite Deutsche Bank shares sinking on Friday, it's unlikely the German bank — which has had 10 straight quarters of profit and strong solvency and liquidity positions — will go down as Credit Suisse did, analysts said.
- U.S. markets edged higher Friday, shrugging off renewed fears of the banking crisis spreading in Europe. Asia-Pacific stocks were mixed on Monday. China's Shanghai Composite fell 0.65% as data showed China's industrial profits plunged 22.9% in the first two months of the year.
- Local governments in China are feeling the pinch too. Their direct debt exceeded 120% of revenue in 2022, according to S&P Global Ratings analysts. Some local governments are trying new ways of boosting revenue — such as selling licenses for bicycle-sharing services.
- PRO Several important economic data points will be released this week: personal consumption expenditures, consumer sentiment and home sales. But concerns about the banking system will likely dominate markets and cause continued volatility.
The bottom line
Just as this newsletter was about to be sent out, the U.S. FDIC announced First Citizens Bank has agreed to buy Silicon Valley Bank's deposits and loans. Details — such as how the agreement will affect shareholders and bondholders — are still forthcoming.
My instinctive response, however, is that markets will welcome the news (eventually). Successfully finding a buyer for a bank that has seen its depositors flee and incurred losses on its bonds is no mean feat. By all appearances, First Citizens Bank is a willing buyer of SVB — unlike UBS' forced marriage with Credit Suisse, orchestrated by Swiss regulators. It signals there is value left in SVB, perhaps in its reputation and relations with the tech and venture capital community. More broadly, it shows there is still confidence in the U.S. banking sector.
It's certainly welcome news after the events of Friday. Now that central banks worldwide have made their interest rate decisions, markets are turning their attention back to the banking sector. In today's heightened atmosphere, however, prudence can quickly — and arbitrarily — tip over into paranoia.
Deutsche Bank appears to be the latest victim of the market's panic. On Friday, after the price of its credit default swaps rose to its highest since 2018, investors sparked a sell-off in the German bank. The move is mostly irrational, according to analysts. Deutsche Bank is not another Credit Suisse in two key aspects.
First, have a look at their fourth-quarter reports. Deutsche Bank reported a 1.8-billion-euro ($1.98 billion) net profit, giving it an annual net income for 2022 of 5 billion euros. By contrast, Credit Suisse had a fourth-quarter loss of 1.4 billion Swiss francs ($1.51 billion), bringing it to a full-year loss of 7.3 billion Swiss francs. The difference between the two European banks couldn't be starker.
Second, Deutsche Bank's liquidity coverage ratio was 142% at the end of 2022, meaning the bank had more than enough liquid assets to cover a sudden outflow of cash for 30 days. On the other hand, Credit Suisse disclosed it had to use "liquidity buffers" in 2022 as the Swiss bank fell below regulatory requirements of liquidity.
Research firm Autonomous, a subsidiary of AllianceBernstein, was so confident in Deutsche Bank that it issued a research note stating: "We have no concerns about Deutsche's viability or asset marks. To be crystal clear — Deutsche is NOT the next Credit Suisse."
While the Deutsche Bank episode reverberated through Europe markets, U.S. investors seemed less concerned. In fact, the SPDR S&P Regional Banking ETF gained 3.03% on Friday. Major indexes also rose — not just for the day, but the week. The Dow Jones Industrial Average inched up 0.41%, giving it a 0.4% week-over-week gain. The S&P 500 rose 0.56%, contributing to a 1.4% weekly increase. The Nasdaq Composite added 0.3% to finish the week 1.6% higher.
It's an impressive showing given market volatility. Unfortunately, there's no promise of stability this week. The personal consumption expenditure price index — the inflation reading most important to the Fed — will come out Friday, and it's "going to be sticky," said Marc Chandler, chief market strategist at Bannockburn Global Forex. But the banking crisis will continue gripping markets so tightly that they might not care about inflation as much — for better or worse.
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