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Banks Are Finally Facing Pressure to Pay Depositors More
Sun Apr 16 09:20:00 2023

Depositors fled to the perceived safety of the titans of finance following a pair of bank failures last month. A raft of earnings this week will show just how costly the run was for everyone else.

Small and midsize U.S. banks lost hundreds of billions of dollars in recent weeks to their bigger peers and to money-market funds offering higher yields. That is likely to force many of them to increase the interest rates they are paying to avoid losing more customers.

The extent of the damage will become clearer when dozens of regional banks including M&T Bank Corp., U.S. Bancorp and Citizens Financial Group Inc. begin to report first-quarter results. Investors, analysts and central bankers are likely to pore over the results looking for clues about the health of the financial system and the broader economy.

“It’s maybe the most critical, sensitive quarter they’re ever going to report in,” said Mike Brauneis, managing director and global financial services industry leader at Protiviti, a management-consulting firm.

Some banks are already jacking up the interest rates they pay savers, with the biggest increases coming from banks with a high percentage of deposits that exceed the Federal Deposit Corp.’s $250,000 insurance cap or whose customers are concentrated in a few industries. Silicon Valley Bank and Signature Bank collapsed after uninsured depositors fled en masse.

Los Angeles-based PacWest Bancorp, a lender with a lot of startup customers, had offered as much as 5.5% for a shorter-term CD in recent weeks. A CD offered by Merchants Bank of Indiana has an introductory yield of about 5.4% that can move higher if the Federal Reserve’s benchmark rate does. Mortgage lenders, a casualty of rising rates, make up a good chunk of customers of the bank’s parent company.

Some banks appear to be trying to “get ahead of any potential situation” and “make sure they have the liquidity if difficulty should arise,” said Ken Tumin, founder and editor of DepositAccounts.com. “Things have started to change over the past month.”

Deposit rates on standard savings accounts have inched up over the past year. The average rate paid on deposits at banks and credit unions was 0.37% in March, according to the FDIC, compared with 0.06% a year earlier.

But rates have moved faster on deposit accounts designed to keep money parked for longer periods.

The average yield for online savings accounts rose to about 3.75% in March, according to indexes from Deposits Online LLC, compared with 0.5% a year ago. Online one-year certificates of deposits on average offered an annual percentage yield of nearly 4.75%, up from less than 1% in 2022.

Even America’s biggest banks are paying more to keep customers from taking their business elsewhere. Citigroup Inc. paid 2.72% on interest-bearing deposits in the first quarter, up from 2.1% at the end of 2022. JPMorgan Chase & Co. paid 1.85%, up from 1.37%, while Wells Fargo & Co. paid 1.22%, up from 0.70%.

Still, those increases didn’t dent the banks’ net interest income, the money they make on loans minus what they pay on deposits. At JPMorgan, America’s biggest bank, net interest income in the first quarter rose 49% to arecord $20.71 billion.

Regional banks that lost customers in the turmoil aren’t likely to fare as well, especially if they were forced to replace low-cost deposits with more expensive loans from the Fed’s discount window or an emergency facility it created to help banks meet withdrawals.

The Fed has raised interest rates at the fastest pace since the 1980s to curb inflation, driving some customers with big account balances to ditch banks in search of better yields. That shift picked up steam after SVB and Signature failed.

“The Fed intended and banks anticipated deposits to leave the system,” said Gerard Cassidy, an analyst at RBC Capital Markets. “It is not to be unexpected, but this accentuated it. No doubt about it.”

Total deposits at banks in the U.S. fell to $17.4 trillion in March, Fed data shows, a $312 billion decline from the start of the month. A year earlier, banks had north of $18 trillion in deposits.

Regional banks have taken the biggest hits to deposits since the turmoil began. The 25 largest U.S. banks gained $18 billion in deposits last month, while the ones below that size lost $212 billion.

There are signs that midsize banks have started to feel the pressure to raise yields. Synchrony Financial and Ally Financial both have recently offered a 5% annual percentage yield on CDs that don’t have any minimum balance requirements.

Synchrony prices products “to be competitive in the market with the desire to attract new customers,” a spokeswoman said. Ally assesses market conditions and other factors to determine rates and can keep them lower because it doesn’t have physical branches, a spokesman said.

When the Fed began its anti-inflation campaign last year, banks were able to charge more for loans and keep the interest they pay on deposits relatively low because pandemic stimulus had flooded them with deposits.

That was nine rate increases and a banking crisis ago.

Property-management company Norhart LLC started to move some of its money from Bell Bank in Minnesota into government bonds earlier this year. The interest the company would earn from Treasurys was nearly 2 percentage points higher than the roughly 3% it got from the bank.

Norhart sped up the shift from traditional bank accounts after the bank crisis started, moving $1.25 million out of a savings account and into Treasurys. In late March, the bank raised the yield on that account a half-percentage point. But Norhart still plans to move the majority of its funds into bonds.

“I just don’t want to risk it on that kind of money,” said Chief Executive Mike Kaeding.

Bank Failures Rattle Market for Short-Term Lending
Sun Apr 16 09:30:00 2023

March’s bank collapses rattled the short-term lending that underpins the financial system, known on Wall Street as funding markets. Traces of the shake-up remain.

At the first signs of banking tumult, funding-market activity fell to its quietest since the Covid-19 pandemic erupted. On two days in mid-March, less than $2 billion of commercial paper with maturities longer than 80 days was issued, according to Federal Reserve data on the short-term IOUs issued by companies to fund their operations. That is well below typical levels for the unsecured debt averaging around $8 billion of issuance a day.

“Our market completely froze,” said Ryan Weldon, portfolio manager of the IFM US Dollar Liquidity Fund, which invests in highly rated, short-term corporate debt through commercial paper and certificates of deposit, known as the CP/CD market.

Prime money-market funds, those that invest primarily in CP/CD, help fund domestic banks. Of the nearly $1.2 trillion invested by prime funds before the March banking turmoil, $125 billion was in U.S. financial institutions, Office of Financial Research data show. Debt from JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. comprised about half of that total.

Foreign banks tap CP/CD markets to borrow U.S. dollars. Prime funds had roughly $575 billion invested abroad as of the end of February. Another $336 billion of prime fund assets are parked at the Fed’s reverse repo facility.

Other companies use commercial paper to fund their day-to-day activities, such as paying employees. Prime funds have roughly $16 billion in U.S. nonfinancial commercial paper.

Rates on the highest-rated 90-day commercial paper—issued by blue-chip borrowers including New York Life Insurance Co., Johnson & Johnson and Procter & Gamble Co.—rose to 0.2 percentage point above the benchmark three-month secured overnight financing rate, or SOFR. Those rates have since narrowed closer to the benchmark, according to IFM Investors’ analysis.

Meanwhile, yields on paper considered to be highly rated—one notch down from the safest securities, issued by foreign banks such as BNP Paribas and Crédit Agricole in recent weeks—surged more than 0.3 point above the three-month SOFR. Those rates remain well-elevated relative to the negative spreads seen before the banking turmoil.

New York Life keeps roughly $500 million in the commercial-paper market at any given time, “keeping their name familiar” should the company ever need to borrow more, said Tom Hendry, senior vice president and treasurer. It might tap the market if normal cash flows were unable to meet an uptick in surrenders—policy cancellations that trigger a cash payout—or policyholder loans, and its high rating allows it to borrow at favorable rates compared with other companies.

“During the Silicon Valley Bank crisis, there was some tightening in the market,” said Mr. Hendry. “Rates ticked up, but we didn’t feel like we were getting squeezed.”

The banking-sector disruptions put pressure on borrowing rates for Duke Energy Corp., one of the largest power producers in the U.S.

“Some companies weren’t able to get the funding or the term they needed from commercial-paper issuances and needed to borrow from their credit facilities,” said Karl Newlin, Duke Energy’s senior vice president of corporate development and treasurer. “We were able to access the commercial paper markets, but at higher rates.”

Barring further banking issues, Mr. Newlin doesn’t anticipate any hurdles going forward.

Lenders were spooked into keeping their cash in shorter-term or safer assets. Further crimping their willingness to lend, investors were yanking cash from prime funds in favor of their government counterparts, which stick to Treasurys, repos and similarly safer assets.

The quick flinch in commercial-paper markets echoed March 2020, when the market seized up and required intervention from the Fed. Minutes from the Fed’s meeting in March showed that staff discussed the pressures in the CP/CD market.

Encouragingly, volumes have since recovered above their long-term averages, leading some analysts to play down the episode’s severity.

“This comes nowhere close to what we saw in 2020,” said Nafis Smith, head of Vanguard’s taxable money markets group.

Still, regulatory scrutiny that cropped up regarding prime funds in the aftermath of the 2008 financial crisis persists

“If there is any place where the vulnerabilities of the system to runs and fire sales have been clear-cut, it is money-market funds,” said Treasury Secretary Janet Yellen at an economics conference on March 30.

That risk of a wave of withdrawals from money funds cascading into broader financial stability hasn’t been sufficiently addressed, she said. Vanguard’s Mr. Smith said the issues highlighted by Ms. Yellen primarily apply to prime funds. Government funds, which have a stricter set of investment options, carry “similar risk profiles to a bank deposit,” he said.

Assets in prime funds fell dramatically after 2016. Regulations were enacted, aimed at preventing funding lockups similar to when concern over Lehman Brothers’ paper sparked a run on the $62 billion Reserve Primary Fund. That caused its net asset value to drop below $1 a share—known as breaking the buck. A wave of withdrawals on other money funds followed, forcing a government response.

Forthcoming regulatory changes threaten to shrink the prime fund industry further, likely raising funding costs, analysts said.

Money-market funds sit at the fulcrum of the financial system, providing credit to banks and other companies while helping investors manage their cash. Assets in money funds have surged more than $715 billion to a record $5.28 trillion since the Fed began raising rates, Investment Company Institute data show.

“Whether we are through this mini-banking crisis or not, we need a little more time and space to see that play out,” said New York Life’s Mr. Hendry.

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$USDJPY has strengthened to fresh multi-month highs today, rising from 107.00 to now trade above 107.40. The pair last traded at these levels in July 2020 before weakening into 2021. The pair has since resurged, rising from 103.00 in January to its current levels. $USD $JPY

Indices Update: As of 14:00, these are your best and worst performers based on the London trading schedule:
Wall Street: 0.08%
France 40: -0.04%
US 500: -0.07%
FTSE 100: -0.15%
Germany 30: -0.21%

Despite the general flagging of risk-leaning assets, the carry favorite yen crosses are actually advancing. $USDJPY is among the leaders, today passing the midpoint of the past year's range:

S&P 500 LOOKING TO BREAK MARCH TREND-LINE

The S&P 500 flirted with a break of the March trend-line on Friday, but held on by a very marginal amount. However, with the past couple of days we are seeing the trend-line come under real pressure again with price sneaking below.

To confirm a break, I’m looking for a break below the Friday low at 3789. To really validate the break a daily close beneath the Friday candle low is ideal. This will also have the Reverse Symmetrical Triangle (RST) pattern in full-swing, a development that has been taking some time to unravel but looks poised to gain momentum.

On a confirmed break the 3694 low from late Jan will be viewed as the next targeted objective. Looking at the broader move off the March 2020 low, a more sizable correction looks to be in order.

This could very well have the rising 200-day in play at some point relatively soon; the line is at 3462 and rising. It would be a nearly 10% decline from here, but again given the magnitude of the rise in less than a year’s time, it would be reasonable to see even if it is only a bull market correction.

Stocks open with modest gains after yesterdays declines

Major indices up about 0.3%
The NASDAQ index tumbled -2.7% yesterday. The S&P index fell -1.31%. The Dow industrial average had a more modest declines -0.39% but each of the major indices close at their lows.

Today we are seeing a modest rebound (relative to those levels). A snapshot of the market 6 or so minutes into the opening currently shows:
S&P index up for 15 points or 0.42% at 3835.54
NASDAQ index up 59 points or 0.46% at 13056.62
Dow industrial average up 150 points or 0.49% at 31418.74
in other markets as equity trading gets underway is showing:
spot gold up $4.20 or 0.24% $1715.43.
Spot silver unchange at $26.10
WTI crude oil futures of $0.90 or 1.47%