“Fed hiking cycles always break something,” wrote BofA Securities investment strategist Michael Hartnett on Friday. This time, he said, it’s the U.S. regional banking system.
The crisis in U.S. regional banks has seen a flight of capital from this sector move into money market funds that have unusually attractive returns. All this is threatening financial stability and future economic growth.
U.S. commercial bank assets have declined by US$960-billion, or 5.3 per cent, of their total assets since the peak in April of 2022, noted Jefferies strategist Christopher Wood in his newsletter this week.
By contrast, money market assets increased by US$794-billion, or 18 per cent, for the same period. These funds, thanks to the latest Federal Reserve rate hike, can use the central bank’s reverse repurchase agreement facility to provide investors with yields over 5 per cent annually.
Mr. Hartnett might be overstating the case by calling the U.S. regional banking sector “broken.” The risk of further bank runs of the type that sunk Silicon Valley Bank and First Republic Bank are possible, although less so now that the Fed has provided emergency loan guarantees to meet deposit flight.
More generally, U.S. smaller and medium-sized banks are in a no-win situation. Their options are to either watch assets leave or raise deposit interest in a profit-crimping effort to compete with money market funds.
Canada’s banks have been largely unaffected by instability down south. The past year has seen the S&P/TSX Bank Index fall 7 per cent which, while not ideal, is much better than the U.S. KBW Bank Index’s 34 per cent decline. Both indexes hold both large and small banks.
The dominance of the major banks within the Canadian economy means they are unlikely to experience any U.S.-style instability. A buying opportunity could potentially arise if domestic bank stocks sell-off further in sympathy with developments in the U.S.
Leave a Reply
You must be logged in to post a comment.