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President Joe Biden said he believes his administration has done a “pretty damn good job” working to resolve the banking crisis and said he thinks it will “take a little while for things to just calm down.”
“So I think it’s gonna take a little while for things to just calm down but I don’t see anything on the horizon that’s about to explode but I do understand there’s an unease about this and these midsize banks have to be able to survive and I think they’ll be able to do that,” Biden said during a news conference with Prime Minister Justin Trudeau in Canada.
Asked what measures his administration would take, including whether he would guarantee more deposits, Biden said if needed he would “have the FDIC use the power it has to guarantee those loans above 250K like they did already.”
“Look, I think we’ve done a pretty good damn job,” Biden said adding, “people’s savings are secure” and “the banks are in pretty good shape.”
Top US financial regulators met behind closed doors on Friday to discuss stress in the banking system and efforts to keep tabs on the developments, according to the Treasury Department.
A readout of the event said the meeting by video conference included Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, FDIC chair Martin Gruenberg and other members of the Financial Stability Oversight Council, or FSOC.
“The council discussed current conditions in the banking sector and noted that while some institutions have come under stress, the US banking system remains sound and resilient,” the readout said.
It’s not clear which banks in particular were discussed but the meeting comes after days of turbulence in the share price of regional banks and a plunge for Germany’s biggest bank, Deutsche Bank.
Treasury said regulators discussed ongoing efforts at agencies to monitor financial developments and also heard a presentation from staff at the New York Federal Reserve Bank on “market developments.”
Stocks closed higher Friday, recovering from earlier losses brought about by a plunge in Deutsche Bank stock.
Shares of the German bank fell 8.5% after a surge in its bond insurances prices spiked investors’ fears about the state of the financial sector.
All three major indexes rose to end the week. The Dow Jones Industrial Average climbed 376 points, or 1.2%. The S&P 500 and Nasdaq Composite gained 1.4% and 1.6%, respectively.
The gains show the market’s resiliency, even as the banking crisis and seemingly conflicting messages from the US economy’s leaders on the security of bank deposits confuse investors.
Still, banking fears are still top of mind for investors. Wall Street will watch for further insight into the crisis next week, when the House Financial Services Committee is scheduled to hold a hearing on the collapses of Silicon Valley Bank and Signature Bank.
The Dow rose about 133 points, or 0.4%.
The S&P 500 gained 0.6%.
The Nasdaq Composite climbed 0.3%.
The Federal Reserve cannot budge from its target of 2% annual inflation, otherwise it would be a “disaster” that could set the US economy and others back five decades, St. Louis Fed President James Bullard said Friday.
Bullard, speaking during a Greater St. Louis Inc. event, said the Fed has a mandate legislated by Congress and the president to maintain stable prices for the US economy. The central bank has defined that target as 2% inflation (as measured by the headline Personal Consumption Expenditures price index).
“[That 2%] is an international standard that was developed in the 1990s,” said Bullard during a Greater St. Louis Inc. event. “I think it would be a disaster to abandon that standard. That would set all the other countries to abandon their standards, and we’d be back to the 1970s. So we don’t want to do that; we want to stick to our 2% goal.”
Fed officials have said the process of disinflation likely could take a while and be “bumpy.” Bullard said he believes it’s achievable.
And for inflation to come down this year, Bullard said he expects a lot of that to come from “price-setters.”
“Price-setters in the economy are thinking carefully about whether they really want to raise prices in an environment where they may lose market share going forward,” Bullard said during a call with reporters following his speech. “It’s known in business, generally, that if you lose market share, customer acquisition tends to be very expensive, and it’s very hard to get that market share to come back.”
He added: “And so I think it’s that process that will lead to disinflation during 2023, and that will include services inflation and other cuts of the inflation data.”
One of the biggest unknowns since the Federal Reserve started its historic rate-hiking campaign has been how many jobs could be lost from the central bank’s deliberate effort to slow down the US economy.
So far, the labor market has stayed white hot, with unemployment hovering at a half-century low. But Fed Chair Jerome Powell’s acknowledgment on Wednesday that the banking sector meltdown could lead to “tighter credit conditions for households and businesses, which would in turn affect economic outcomes” has critics reminding him of the human impact of that “Fedspeak:” Millions of people out of work.
The Fed’s latest economic projections, released on Wednesday, were largely in line with those from its last forecast, in December. In fact, the unemployment picture even grew a tinge less gloomy, with an estimated 2023 jobless rate of 4.5% instead of 4.6%.
Assuming no change in the labor force, going from the current unemployment rate of 3.6% to 4.5% would mean 1.5 million more people would be unemployed by the end of the year, according to the Fed’s projections.
While the Fed’s own estimates hint at some sort of stability, even the head of the central bank is quick to note that’s far from the case.
“It’s a highly uncertain estimate,” Fed Chair Jerome Powell said Wednesday.
And, economists say, that uncertainty is heightened, given the banking turmoil of the past two weeks.
Stocks’ declines lost steam Friday as shares of Deutsche Bank recouped some of their earlier losses.
The Dow fell about 70 points, or 0.2%. The S&P 500 dropped 0.2%. the Nasdaq Composite slipped 0.6%.
Shares of Deutsche Bank closed 8.5% lower in Frankfurt after its bond insurance prices surged, worrying investors already skittish from recent woes in the financial sector. The bank had been down more than 14% earlier in the day.
US regional bank stocks also recovered some of their recent declines. Shares of First Republic were down about 1.3%. Shares of New York Community Bancorp rose 1.8%.
Meanwhile, EU leaders tried to calm fears about Europe’s banking sector to limit fallout from Deutsche Bank. The European Council of EU heads of state and government said that the sector is “resilient.”
In the US, Treasury Secretary Janet Yellen is slated to hold a private meeting of financial regulators. Yellen has given seemingly confusing statements about how much the government will intervene to help limit the banking crisis in recent days, sending ripples through the market.
Shares in Deutsche Bank closed down 8.6% Friday, paring earlier losses.
The bank’s stock had sunk as much as 14.5% earlier in the day as investors fretted over whether turmoil in the financial sector had spread to Germany’s biggest lender.
The cost of buying insurance against a possible default by Deutsche Bank has soared in recent days. Its five-year credit default swaps surged to 203 basis points Thursday, according to data from S&P Market Intelligence. That’s the highest level since early 2019. The swaps continued to climb Friday, trading at 208 basis points at midday ET.
The bank has been a problem child for years. Over the past decade, Deutsche Bank racked up billions of dollars in losses as it struggled to compete with larger Wall Street rivals and paid the price of a string of scandals. It has gone through several strategy changes, major restructurings and mass layoffs over the past five years.
The bank has since rebounded strongly under CEO Christian Sewing, and last month reported its highest pre-tax profit in 15 years.
Analysts told CNN that rising interest rates, as well as an announcement by Deutsche Bank Friday that it would pay back one of its bonds five years early, had rattled investors.
Repaying bonds before their maturity is usually an indication that a bank’s balance sheet is in good health. But some investors may have interpreted the move as a sign Deutsche Bank is nervous about the banking sector, Jonas Goltermann, deputy chief markets economist at Capital Economics, told CNN.
Deutsche Bank’s decision to pay back the bond ahead of schedule was pre-planned and not a reaction to recent market developments, a source familiar with the matter told CNN. The bond would have gradually lost its eligibility as a form of regulatory capital according to rules brought in after the 2008 financial crisis, the source said.
The bank replaced the bond by issuing another bond of the same type in February, they added.
The recent string of bank collapses are more likely one-offs than “harbingers of poor US macroeconomic performance,” St. Louis Fed President James Bullard said Friday.
“It’s true that when you raise rates, you’re talking about affecting all these financial entities and all these different corners of the financial markets,” he said. “Not every single one of them is going to adjust appropriately to the higher rate environment.”
Bullard cited a handful of examples from recent history, including: in 1984, when Continental Illinois National Bank and Trust Company became the largest ever bank failure in US history; the Mexican peso devaluation in 1994; and the demise of the Long-Term Capital Management hedge fund in 1998.
Silicon Valley Bank, which took on billions of dollars of deposits from the cash-flush tech industry during the pandemic, is very likely another “unusual case” versus a sign of broader macroeconomic weakening, he said.
“If you’re in a forest and then you come to a place on the road and there’s a stop sign, and you’re not sure if you’re supposed to take a right turn at the stop sign or if you’re supposed to go straight; you don’t want to split the difference and drive into the forest,” he said. “You’ve got to make a decision about which way you’re going to go.”
And Bullard’s decision hinged on what he viewed as his greatest probability scenario:
“The most likely case is that this is a quirky bank that had a special problem and we have taken actions to mitigate this and probably financial stress will abate,” he said. “If it doesn’t, I will have taken a wrong turn, but I think that’s a lower probability here.”
St. Louis Federal Reserve President James Bullard said Friday that he’s putting an 80% probability on financial turmoil easing but also is anticipating additional rate hikes from the central bank in response to a stronger-than-expected US economy.
“What I actually think will happen in the 80% probability scenario that the financial stress abates and that we’re left dealing more with a more rapidly growing economy and higher inflation is that we’ll be forced to ratchet [the Fed’s benchmark rate] up somewhat higher as we go through 2023,” Bullard said during a call with reporters following a speech at a Greater St. Louis event.
Bullard’s base scenario presumes that the focus would return to the economy itself, which continues to show strong labor market readings and inflation dialing back as a slower pace than expected.
“If it doesn’t abate, that’s a completely different world where financial stress gets more intense, and I would be willing to react to that,” he said.
The latest Fed economic projections, which were released Wednesday, include an expectation for an additional quarter-point increase by the end of this year. Bullard said he raised his personal expectation beyond that by another 25 basis points, putting his projections for the Fed funds rate at 5.625%.
The Federal Reserve faced a particularly vexing decision this week: Should it raise interest rates during a bank crisis?
For Tom Barkin, the decision wasn’t especially challenging. Inflation, he says, remains public enemy No. 1.
“Inflation is high. Demand hadn’t seemed to come down. And so, the case for raising was pretty clear,” Barkin, the president of the Federal Reserve Bank of Richmond, told CNN in an exclusive interview on Friday.
Barkin, who participates in the Fed’s debate but doesn’t have a vote this year, conceded that every decision is “hard” and fully debated.
But the economic reports heading into this week’s Fed meeting suggest the economy remains too hot. The Fed ultimately reached a unanimous decision to raise interest rates for the ninth meeting in a row.
“The labor market is tight. Historically tight,” Barkin said. “Inflation, unfortunately, has stayed too high.”
Some experts, including former FDIC Chair Sheila Bair and Moody’s Analytics Chief Economist Mark Zandi, urged the Fed not to exacerbate turmoil in the banking system by raising interest rates following the failures of Silicon Valley Bank and Signature Bank.
“For me, the question was: Do you see such stresses happening that you felt like you really had to pull back and learn more?” said Barkin. “It felt very stable by the time we got there. So, the conditions were right to do monetary policy the way we want to do monetary policy.”
EU leaders are trying to calm fears about Europe’s banking sector after bank shares slumped Friday.
“Our banking sector is resilient, with strong capital and liquidity positions,” the European Council of EU heads of state and government said in a statement after a summit in Brussels.
Dutch Prime Minister Mark Rutte played down fears of a new banking crisis in the EU, saying regulations were now much improved.
“For me it seems very unlikely, because of how the European system is organized,” he told reporters. “The European framework is solid, there are strong buffers and discussion processes,” he added.
German Chancellor Olaf Scholz said there was “no reason to be concerned” about Deutsche Bank, after its shares fell as much as 14%.
“Deutsche Bank has modernised and organised the way it works. It’s a very profitable bank,” Scholz told reporters.
French President Emmanuel Macron also expressed his faith in the euro area banking system.
“We have strict regulations in the euro zone, with a very high transparency of the ratios that are closely followed,” Macron told journalists Friday.
He dismissed the stock turbulence of Deutsche Bank today as “speculative behavior and players looking to make money from short-term moves.”
Investors have been rattled by the collapse of two US regional banks — Silicon Valley Bank and Signature Bank — earlier this month. Sunday’s rescue of Credit Suisse by bigger Swiss rival UBS calmed markets at the start of this week, but the fear of a wider banking crisis returned Friday.
In their joint statement, EU leaders said the European economy had “entered 2023 on a healthier footing than previously expected, despite high inflation and energy prices.”
The recent chaos in the banking system may the be catalyst for a recession this summer, according to economists at Fannie Mae, the government-sponsored company that promotes liquidity and stability in the US housing market by purchasing and guaranteeing mortgages.
Fannie Mae’s Economic and Strategic Research (ESR) group thinks the collapse of Silicon Valley Bank and Signature Bank could lead to tighter lending standards among regional banks — cooling the economy into recession.
“Bank failures often foreshadow economic downturns,” the group said in a report Friday.
Still, the ESR group was careful to differentiate between the current economic situation and the 2008 Financial Crisis.
They predict this downturn will be less severe than 2008 and more akin to the Savings & Loan Crisis from the 1980s — when interest rate rises exacerbated banking system stress and contributed to a modest recession in 1991(read more about that here).
“Inflation has now been joined by financial stability concerns as threats to sustained growth,” said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae.
“These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening – but this may well be the catalyst for the modest recession we’ve been expecting since April 2022,” he said.
Treasury Secretary Janet Yellen is scheduled to lead a private meeting of financial regulators on Friday amid continued concerns about the health of the banking system.
The meeting, held by the Financial Stability Oversight Council that Yellen chairs, is closed to the press, according to guidance sent Thursday night by the Treasury Department.
The meeting will include Wally Adeyemo, the deputy Treasury secretary. Adeyemo is among the officials leading the department’s response to the bank crisis.
Founded in 2010 as part of the Dodd-Frank law, FSOC monitors the stability of the financial system. The council is comprised of more than a dozen regulators, including the chairman of the Federal Reserve, the Comptroller of the Currency, the chair of the Federal Deposit Insurance Corporation and the chair of the Securities and Exchange Commission.
The Treasury Department typically provides a readout of FSOC meetings.
Stocks fell Friday morning as shares of Deutsche Bank tumbled, setting off a fresh wave of bank fears.
Shares of Deutsche Bank fell over 10% after the German bank’s bond insurance prices surged, which is what happened to Credit Suisse before it crashed.
The pain resonated through the banking sector. The SPDR Regional Banking Equity Traded Fund, which tracks a number of small and mid-sized bank stocks, fell 2.1%. Shares of Wells Fargo and JPMorgan Chase dropped roughly 2% and 1.2%, respectively.
CNN’s Fear & Greed Index was at 31, indicating fear in the market.
While the federal and global governments have intervened in recent weeks to contain the banking crisis, investors are still on edge since the rescues don’t guarantee that the financial sector is safe.
Investors also continued to digest Treasury Secretary Janet Yellen’s testimony before Congress on Thursday, where she stated that the government could intervene again to rescue financial institutions if they threaten to carry systemic risk.
The Dow fell about 160 points, or 0.5%.
The S&P 500 slipped 0.6%.
The Nasdaq Composite dropped 0.5%.
Mortgage rates have taken would-be buyers on a ride this year — and it’s only March.
Generally, home buyers can anticipate mortgage rates to move down through the rest of this year as the banking crisis drags on, which could cool down inflation.
But there are bound to be some bumps along the way. Here’s why rates have been bouncing around and where they could end up.
Inflation is still quite high, but it is slowing and analysts are anticipating a much slower economy over the next few quarters — which should further bring down inflation. This is good for mortgage borrowers, who can expect to see rates retreating through this year, said Mike Fratantoni, Mortgage Bankers Association senior vice president and chief economist.
The MBA forecasts that mortgage rates are likely to trend down over the course of this year, with the 30-year fixed rate falling to around 5.3% by the end of the year.
Another day, another problem to worry about in the banking crisis. The focus of Wall Street’s concerns today: Deutsche Bank.
Germany’s biggest bank has been a well-known problem child for years. Over the past decade, Deutsche Bank racked up billions of dollars in losses as it struggled to compete with larger Wall Street rivals and paid the price of a string of scandals. It has gone through several strategy changes, major restructurings and mass layoffs over the past five years.
The bank has since rebounded strongly under CEO Christian Sewing, and last month reported its highest pre-tax profit in 15 years.
Earlier this week it reassured investors that it had “near zero” exposure to riskier bonds issued by Credit Suisse that were wiped out under the terms of its emergency rescue by UBS on Sunday.
But as the banking crisis drags on, investors are growing hypersensitive to any perceived weaknesses. When the cost of buying insurance against the risk of Deutsche Bank defaulting soared, that was enough to trigger the latest panic selling.
Deutsche Bank’s shares tumbled 13% in Germany, dragging broader markets lower.
The last-minute rescue of Credit Suisse on Sunday may have prevented the banking crisis from exploding, but it’s a raw deal for Switzerland, and isn’t risk free.
The tie-up with its larger rival, UBS, offered the best chance of restoring stability in the banking sector, and protecting the Swiss economy in the near term.
But it leaves Switzerland exposed to a single massive financial institution, even as there is still huge uncertainty over how successful the mega merger will prove to be. Thousands of job losses are expected.
Taxpayers are on the hook for up to 9 billions Swiss francs ($9.8 billion) of future potential losses at UBS arising from certain Credit Suisse assets, provided those losses exceed 5 billion francs ($5.4 billion). The state has also explicitly guaranteed a 100 billion Swiss franc ($109 billion) loan UBS, should it need it.
Switzerland’s Social Democratic party says the newly created “super-megabank” increases risks for the Swiss economy.
With a roughly 30% market share in Swiss banking, “we see too much concentration risk and market share control,” JPMorgan analysts wrote in a note before the deal was done. They suggested that the combined entity would need to exit or IPO some businesses.
The problem with having one single large bank in a small economy is that if it faces a bank run or needs a bailout — which UBS did during the 2008 crisis — the government’s financial firepower may be insufficient.
At roughly $1.7 trillion, the combined assets of the new entity amount to double the size of Switzerland’s annual economic output. Measured by deposits and loans to Swiss customers, UBS will now be bigger than the next two local banks combined.
And at 333 billion francs ($363 billion), local deposits in the new entity equal 45% of GDP — an enormous amount even for a country with healthy public finances and low levels of debt.
UBS is in a much stronger financial position than it was in 2008 and it will be required to build up an even bigger financial buffer as a result of the deal.
“Having been chief financial officer [at Morgan Stanley] during the last global financial crisis, I’m well aware of the importance of a solid balance sheet. UBS will remain rock-solid,” UBS chairman Colm Kelleher said Sunday.
In a call with analysts, CEO Ralph Hamers said UBS would try to remove 8 billion francs ($8.9 billion) of costs a year by 2027, 6 billion francs ($6.5 billion) from cutting jobs.
According to Andrew Kenningham of Capital Economics, the “track record of shotgun marriages in the banking sector is mixed.”
“Some, such as the 1995 purchase of Barings by ING, have proved long-lasting. But others, including several during the global financial crisis, soon brought into question the viability of the acquiring bank, while others have proven very difficult to implement.”
In the wake of Silicon Valley Bank’s collapse and subsequent banking meltdown, cash is king. The turmoil inflicted on financial markets has sent cautious investors running away from volatile markets and toward more liquid alternatives.
Money market funds, widely thought to be one of the safest, lowest-risk investment options, have seen an influx of cash in recent weeks as investors look for more stable ground.
These funds invest in short-term securities like government bonds, certificates of deposit — or fixed-term savings accounts — and commercial debt. The goal of a money market fund is to provide investors with a relatively stable investment option that offers higher returns than traditional savings.
But money markets aren’t without risks of their own, especially when they experience a large wave of investors all at once.
What’s happening: Since the Fed began to raise interest rates a year ago, the amount of money in money market funds has increased by roughly $400 billion. The inflows totaled more than $120 billion alone last week, according to Apollo Global Management. That means a record $5 trillion is currently invested.
Not-so-safe haven: But the more money there is invested in these funds, the greater the risk that cash could also flow out quickly, creating a money-market liquidity crisis — where funds may not have enough cash on hand to meet those redemptions.
Money market funds are deeply interconnected with the wider financial system, and often face the same risks as banks.
They typically invest in securities with maturities of 90 days or less, meaning they are very sensitive to changes in interest rates. They also invest heavily in commercial debt — if there’s a significant economic downturn the issuers could default on their obligations.
Stocks: US stock futures fell sharply as a new concern emerged in a bank sector already on edge. Dow futures were down 340 points, or 1%. S&P 500 futures fell 0.9%. Nasdaq Composite futures were 0.6% lower. European markets tumbled, and Asian markets were slightly lower.
Fear & Greed Index: 31 = Fear
Oil & gas: US oil prices were down 3.5% to $67 a barrel. Average US gas prices held steady at $3.44 a gallon.
Europe’s banking stocks tumbled Friday in a sign that investors are still nervous that the recent crises at some banks could spill over into the wider sector.
Europe’s Stoxx Europe 600 Banks index, which tracks 42 big EU and UK banks, fell 5% in morning trade. The index is down 19% from its high in late February. London’s bank-heavy FTSE 100 index dropped 2%.
Shares in Germany’s Deutsche Bank (DB) plunged 13.6%, while shares in UBS (ACPTX) and Credit Suisse (AMJL) slid 7% and 7.4% respectively Friday, following falls of 4.3% and 3.6% on Thursday.
The falls in UBS and Credit Suisse come after Bloomberg reported Thursday that the US Department of Justice (DOJ) was investigating whether their staff had helped Russian oligarchs evade Western sanctions.
The DOJ had sent subpoenas to those employees before UBS took over Credit Suisse, according to the report.
Employees at some major US banks are also part of the probe, Bloomberg said.
“Contagion fears are not yet going away — bank shares are lower again this morning and weighing on broader sentiment. Yesterday we witnessed Deutsche Bank credit default swaps blow out,” Neil Wilson, chief markets analyst at trading platform Markets.com, said in a note Friday.
In testimony before Congress Friday, Treasury Secretary Janet Yellen tried to calm markets about the government’s efforts to prevent another bank run.
Yellen said the government used “important tools to act quickly to prevent contagion” and could use those tools again “for an institution of any size if we judged its failure would pose a systemic risk.”
This comes after Yellen seemed to spook markets late Wednesday by saying Treasury isn’t considering guaranteeing all bank deposits. That sent the Dow tumbling 500 points Wednesday. Markets recovered somewhat Thursday.
Banks borrowed less this week from Federal Reserve emergency backstop funds than last, but not by much.
The Federal Reserve lent financial institutions a total of $163.9 billion in the week through March 22, compared with $164.8 billion last week, according to Fed data released Thursday.
Prior to the banking meltdown, those numbers had averaged in at around $10 billion a week.
But banks borrowed $53.7 billion — nearly five times more this week than last — under the Fed’s newly launched Bank Term Funding Program. The Fed also reported lending to foreign central banks of $60 billion, up from zero on March 15.
The elevated numbers this week signal that turmoil is still working its way through the banking system. That turmoil has led some banks to look for quick access to cash to make customers whole or increase liquidity, which is what the central bank programs seek to provide.
