Banking Panic Averted (for Now)

Hyperventilating about the banking crisis? Breathe into a paper bag, and then repeat after me: This is not 2008.

The banking crisis has triggered volatility in equity markets, but investors are starting to regain their composure, as policymakers take decisive action. Central bankers around the world have implemented several programs and backstops to bolster cash flow for banks.

Worries linger over regional banks, but the big banks (especially those based in the U.S.) remain on solid ground.

In 2018, the U.S. Congress enacted legislation that significantly loosened Dodd-Frank capital requirements on smaller institutions; we’re now suffering the consequences. But generally, the U.S. banking system is well-capitalized and able to withstand the latest pressures.

Rather than contagion, I predict a wave of mergers and acquisitions, as the big healthy banks pick up beleaguered regional players at bargain prices.

The 2008 financial crisis generated a massive shift of assets to the biggest Wall Street banks such as JPMorgan Chase (NYSE: JPM). After the recent failures of the small fry, the behemoth banks are about to get even bigger.

That said, investor jitters about the banking sector are settling down. The main U.S. stock market indices closed sharply higher Tuesday, as follows:

  • DJIA: +0.98%
  • S&P 500: +1.30%
  • NASDAQ: +1.58%
  • Russell 2000: +1.88%

Regional bank stocks rallied as well. The SPDR S&P Regional Banking ETF (KRE) jumped 5.76%. The benchmark 10-year Treasury yield climbed past 3.60%. European equities also rose, especially financials. Tuesday marked the second consecutive day of gains for U.S. equities.

Swiss shenanigans…

The Swiss government announced Sunday that UBS (NYSE: UBS) would buy its smaller, ailing rival Credit Suisse (NYSE: CS) for $3.2 billion. The merger also is backed by $280 billion of state funds.

Customers had already pulled $110 billion from the bank during the last three months of 2022, outflows that it was fighting to stem.

The merger of Switzerland’s biggest and second-biggest banks helped assuage fears that Credit Suisse’s liquidity problems would set the world’s banking dominoes toppling.

Credit Suisse’s implosion has been a long time in the making. Based in Zurich, the global investment bank has a history of convictions for financial crimes, notably money-laundering. The secretive bank also has been probed for its coziness with sanctioned oligarchs.

Credit Suisse’s market capitalization dropped from $45 billion in 2017 to $12 billion by the end of 2022 (see chart).

In years past, many of Credit Suisse’s ultra-wealthy clients have been exposed as a rogue’s gallery of dictators, gangsters and corrupt politicians. However, as the bank recently struggled with staggering operating losses, Swiss regulators deemed it as too big to fail.

The UBS/Credit Suisse buyout values the latter at less than 15% of its market capitalization three months ago. As part of the buyout deal, Swiss regulators also announced that so-called additional tier-one (AT-1) bonds will be written to zero, wiping out $17 billion for those unlucky bondholders.

Shareholders got clobbered, too. Saudi National Bank, for example, lost over $1 billion on its CS shares. The upshot, though, is that the international banking system has averted the chaos that would have resulted if Credit Suisse had been allowed to go under.

Crisis? What crisis?

Global investors have been fleeing to safe havens. Gold prices have shot upwards and currently hover near $2,000 per ounce, the highest in about 11 months, although gold fell 2% on Tuesday as the crisis mentality dissipated.

Now the Federal Reserve faces a challenge. The Fed is committed to fighting inflation, but rising interest rates are taking their toll on the economy and, as we’ve seen, on certain banks (such as failed Silicon Valley Bank) that made bad bets on long-term bonds.

WATCH THIS VIDEO: Here’s Why 2023 Is Not 2008

When it announces its rate policy on March 22, the Fed could give a jolt of adrenaline to the financial system by sitting pat on rates…but I wouldn’t bet on it. The likely decision will be a hike of 0.25%.

That said, it’s also likely that Fed Chair Jerome Powell, in his remarks after the policy announcement, will offer soothing rhetoric about the Fed’s willingness to expand liquidity programs. Powell knows the Fed’s meeting comes at a delicate time.

The trend is your friend…

An old-time trader once told me, “If you can correctly determine the trend of a market, you will make money.” This might sound simple, but it’s actually quite profound.

The reason: Even if you’re wrong in your timing, but right on the trend, the trend will tend to bail you out (in most cases). If you’re good at timing (picking a short-term bottom in a major downtrend, for example), the trend will have a tendency to eliminate your paper profits in short order, despite your excellent timing.

In the long run, fundamentals will determine price. This year, markets will remain volatile over the near term, but conditions should stabilize when it becomes clear to investors that the rate tightening cycle is nearing its end.

The next time you see a troubling news headline…take a deep breath. I expect economic recovery and a new bull market to emerge in the latter part of 2023.

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John Persinos is the editorial director of Investing Daily.

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