Banks had a meltdown. What comes next?

New York (CNN) Global banks have just had their worst week since 2008. What comes next?

The fallout from this month’s banking turmoil — the surprise bank runs and collapses of Silicon Valley Bank and Signature Bank — is widespread. In its wake, the global banking system has been shaken.

There is more volatility ahead in the coming week. But that doesn’t mean this is a repeat of the global financial crisis of 15 years ago. Daily customers’ deposits are guaranteed and regulators around the world say the banking system remains sound.

Credit Suisse and First Republic: Two more benches faltered but held up all week. Beleaguered megabank Credit Suisse announced last week that it will need up to $53.7 billion in support from the Swiss central bank to stay afloat. Meanwhile, the First Republic bank received a $30 billion lifeline from some of the largest banks in the United States on Thursday.

Still, those lifelines may not be enough to keep them afloat. US-traded shares of Credit Suisse fell nearly 7% and shares of First Republic fell about 33% on Friday. JPMorgan analysts wrote this week that a UBS takeover of Credit Suisse seems likely.

U.S. commercial bank earnings are under pressure from deteriorating asset quality, slowing loan growth and rising deposit rates, said Seema Shah, chief global strategist at Principal Asset Management.

But SVB and Signature Bank were unique in that many of their deposits came largely from the struggling tech and crypto sectors. These banks also held an unusually high proportion of their clients’ deposits in government bonds — which had fallen in value when the Fed started raising interest rates, she said.

First Republic does not have the same problems as Silicon Valley Bank. Long-term Treasury bonds made up 55% of all SVB assets and only 15% of First Republic’s.

“Ultimately, investors must decide whether these individual/idiosyncratic crises are growing concerns, or mark the beginning of crisis contagion,” Shah wrote in a note last week.

Another red flag: But these meltdowns may not be entirely peculiar.

Before the collapse, SVB had become the largest borrower of the Federal Home Loan Bank in San Francisco. The FHLB has been called a “lender of the second last resort” by Fed personnel. Silvergate Bank, another recently collapsed bank that largely supported the cryptocurrency sector, also borrowed heavily from the FHLB system, according to the Brookings Institution.

First Republic has also been a big borrower from the FHLB. The bank had about $14 billion in loans from them at the end of 2022, up from just $3.7 billion in 2021.

Another bank that has made significant FHLB loans in San Francisco is Western Alliance. Shares of the regional bank were also tumultuous this week, closing more than 15% lower on Friday.

That doesn’t mean banks that take money from the FHLB and participate in the Federal Reserve’s Emergency Bank Term Lending Program, which lent $12 billion to banks this week, are in big trouble.

“There is nothing wrong with using lenders of last resort to cope with an overheated economy,” Bank of America economists Ethan Harris and Shruti Mishra wrote Friday.

But it does raise red flags. There is a sharp increase in borrowing from the Fed’s discount window to $153 billion from $5 billion last Wednesday. That is the largest loan amount ever recorded.

“The surge in bank emergency loans out of the Fed’s discount window points to funding and liquidity pressures on banks caused by weakening depositor confidence following a bank run-down and two bank failures,” Moody’s analysts wrote. last week. said, is “in line with Moody’s negative view of the US banking system.”

Stay vigilant, but don’t panic: So what should a concerned investor or bank customer do? Remain calm, but vigilant, analysts say. “Looking ahead, investors will need to monitor what happens at regional banks with deposits and loans to consumers and loans to businesses,” said Torsten Slok, chief economist at Apollo Global Management.

Meta’s U-turn

Meta Platforms shareholders rejoiced last week after founder and CEO Mark Zuckerberg announced a long-awaited shift in the company’s strategy and measures to strengthen its balance sheet.

The tech giant said last Tuesday it plans to cut another 10,000 workers, marking its second massive round of layoffs in four months. Zuckerberg said in a letter to staff that same day that the company is shifting its focus from the metaverse to artificial intelligence.

These changes come after Facebook rebranded as Meta last year to signify its costly shift to the virtual world. Shareholders reacted negatively to the company’s strategy, demanding it cut costs as the Federal Reserve raised interest rates, increasing pressure on markets and the economy. Shares of the stock accordingly fell by about 70% in 2022.

So, what does Meta’s turnaround mean? Analysts say this cost-cutting measure and shift to AI is what Wall Street has been waiting for all along.

Investors certainly seem pleased. Shares of Meta rose nearly 9% last week.

“The layoffs were music to the ears of investors who were tired of Zuckerberg and Facebook spending money like an ’80s rock star in recent years,” said Dan Ives, senior equity research analyst at Wedbush Securities.

The company’s shift in focus on AI has helped convince investors that Meta is focused on improving current performance rather than the metaverse, which could take years to monetize.

Additionally, the company’s prioritization of AI comes as its competitors solidify their own stakes in the space, suggesting that Meta doesn’t want to lag behind other tech giants in the AI ​​craze. Microsoft said in February that it used the technology behind ChatGPT for its Bing search engine. Google announced its own AI product Bard a day earlier.

While some believe Meta is out of the woods when it comes to its exhausting woes, it will probably have a rough road ahead when it comes to competing against its tech giants.

“There’s a game of thrones going on in the technology around AI,” Ives said. “They have clear growth challenges ahead.”

Next one

Monday: President Christine Lagarde of the European Central Bank (ECB) speaking; Weekly reserve balances at Federal Reserve Banks are released.

Tuesday: Sale of existing homes in the US.

Wednesday: The FOMC releases its latest policy rate decision and economic projections. Federal Reserve President Jerome Powell answers questions from reporters.

Thursday: The Bank of England publishes its latest policy rate decision; US building permits, new home sales and first jobless claims.

Friday: US core sustained good orders and PMI.

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