Market Update: March 17, 2023

The market actually rallied this week despite all the craziness in the regional banking industry that included one more bank failure and two more bailouts this week.

There have been several developments since the update last week. Over the weekend, another West Coast bank, Signature Bank failed. Credit Suisse teetered over the failure edge before getting bailed out by the Suisse government. Credit Suisse continued to wobble this morning as new failure warning signs emerged. And First Republic received a lifeline from 11 of the largest banks in the country to shore up their balance sheet.

Last week we talked about how a bank fails after withdrawals that exceed the cash held at the bank force selling of investments at a loss. When those losses exceed the total value of deposits then the bank fails. We did find out over the weekend that the Federal Reserve provided a solution for those banks called the Bank Term Funding Program. With this program, the bank may pledge assets to the Federal Reserve at par value in exchange for $200 of cash borrowed. That term “par value” is key because it allows the bank to receive full face value of cash for an investment that might be trading at a loss. So the investments might have a market value of $180 but can receive the full $200 of face value to cover the $200 withdrawal. Eventually, the bank will have to pay back the Fed to get their assets back but this does prevent selling assets at a loss and temporarily keeps the bank from failing.

After the rollout of this program, US banks have borrowed $11.9 billion from the bank term funding program and a further $153 billion from a similar, existing program called the Federal Reserve Discount Window.

Which means the Federal Reserve Balance Sheet, which has spent the last year reducing the size of said balance sheet by about $614 billion. In the last week, thanks to these two programs, the Fed balance sheet is back up another $297 billion. This probably means that interest rates will not be increased at the next Fed meeting because Mr. Powell finally broke something.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved March 17, 2023, from FactSet Database.

2.FactSet Research Systems. (n.d.). US Federal Reserve Balance Sheet (Interactive Charts). Retrieved March 17, 2023, from FactSet Database.

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