All Clear
All Clear
A wide range of data and commentary indicate that both the banking panic is over and that it had only a limited impact on credit availability. The March panic was fundamentally a problem of a few poorly managed banks and not a crisis. Investors are no longer running to money funds and now appear comfortable again with the banking system. Overall bank lending activity was little changed in March and continues to grow in April. A number of regional banks also guided for continued loan growth in 2023, albeit at a slower pace than last year. These banks also indicated deposit rates may rise faster than anticipated, but not in an unmanageable way. This post reviews the stabilization in the banking sector, notes that the impact on bank lending appears limited, and suggests that even bank profitability will be fine.
The Panic is Over
The collapse of SVB generated market volatility, but was not indicative of broad weakness in the banking sector. Regional banks are by definition regional, so their troubles are confined to their region. The failure of SVB led to a panic in neighboring First Republic, but many banks outside of the Bay Area noted limited spillovers. The CEO of PNC, an East Coast based bank twice the size of SVB, explicitly noted limited impact on their business. SVB was unique in its fatal reliance upon a very flighty and concentrated deposit base.
Money fund data indicate that the investor community is again comfortable with the banking sector. The collapse of SVB led to a sudden aversion to bank credit risk that resulted in significant inflows into government MMFs, which can only invest in credit risk free assets. Even prime MMFs, which lend conservatively to banks, saw outflows immediately after SVB. The assets levels of both MMF types have since stabilized.
Bank Lending is Steady
Concerns over a potential bank “credit crunch” have thus far been unfounded. Bank lending standards have been tightening for months, but that does not mean that that standards are very restrictive. A tremendous lending boom took place in 2022 on the back strong economic growth and low interest rates, and now conditions are normalizing. Fed data show that bank loan growth continued in March at a healthy rate that is lower than 2022 but in line with historical data. The most recent weekly data indicates that bank loan growth continued steadily throughout the first two weeks of April.
A number of regional banks guided towards modest loan growth in 2023 and did not appear to be meaningfully impacted by the March panic. The banks generally remarked that moderating loan growth stemmed from tighter lending standards and lower loan demand due to higher interest rates. This is a trend that had already been in motion for months.
| Expected Terminal Beta | 2023 Loan Growth Outlook | |
| PNC | ~42% | 5-7% |
| Fifth Third | ~47% | 2-3% |
| M&T | ~40% | 1-3% |
| Key Bank | ~40% | 6-9% |
| Huntington | ~40% | 5-7% |
| Regions | 35% | 4% |
| Zion | ~45% | “slightly increasing” |
| Comerica | ~50% | 8-9% |
Profitability is OK Too
The March panic appears to have raised expected terminal deposit betas, but that does not mean the betas will be high. Deposit betas indicate the degree of pass-through of rate hikes to depositors, so higher betas would lower net interest margins. Regional banks widely expect terminal betas to be a bit above 40%, which is slightly above the last hike cycle but below that of the 2004 cycle. The historical data suggest banks can easily manage that level of deposit beta and the banks themselves indicated only slight lowering of net interest margins. Note that deposit betas increase slowly but are lowered rapidly, so eventual future Fed cuts would rapidly improve profitability.
Deposit betas will likely remain very manageable even if the Fed maintains a higher for longer stance. Unlike prior cycles, QE has left the banking system with an exceptionally high level of deposits in excess of loans. Recall, not long ago many banks were pushing depositors into money funds. The loan to deposit ratio of large banks remain around multi-decade lows, while those of small banks are below levels prevailing prior to 2020. QT will incrementally drain deposits, but it has not been a fast process.
Revisiting the Cuts
The March banking panic led to significant revision of the expected path of policy that may need to be revisited. Out of an abundance of caution, the Fed scuttled a potentially higher rate path and the market priced in aggressive rate cuts in the second half of 2023. The realization that the banking sector is not collapsing has prompted some repricing, and the eventual realization that it is actually healthy may prompt a further repricing.
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