If The Banking Crisis Is 'finished,' Is It Too Soon To Buy Bank Stocks?

With the bankruptcies of Silicon Valley Bank and Signature Bank of New York on March 10 and 12, respectively, one week into the U.S. banking crisis, Odeon Capital Group analyst Dick Bove said on Thursday that the crisis was "finished" and that the sector will "fix its own problems."

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Let's first go through what transpired before to Bove's sigh of relief:

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A subsidiary of SVB Financial Group (SVB, -60.41%), Silicon Valley Bank soon failed after suffering losses when selling securities to obtain money to offset higher-than-anticipated deposit outflows caused by "elevated cash burn levels" among its clients, which included venture capital firms.

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Greg Robb described the "perfect storm" that caused SVB to fail.

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Despite having a varied business model, Signature Bank of New York (which was owned by Signature Bank Corp. SBNY, -22.87%) suffered from a damaged reputation as a result of the services it provided to virtual currency exchanges and related businesses in recent years, particularly following the bankruptcy of FTX in November. The bank's deposit withdrawals increased until state officials made the decision to shut it down.

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The Treasury Department, Federal Reserve, and FDIC took two exceptional actions on March 12 in response to the failure of Signature Bank.First, they declared that all depositors—including those with uninsured deposits—in the two failing banks would have complete access to their funds. The regulators added that the Fed had established a new lending facility that would permit banks to obtain fresh loans at par, or face value, secured by their holdings of securities. As a result, banks that needed to increase their liquidity wouldn't have to sell bonds at a loss if rising interest rates drove down the market value of those bonds.

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Yet, those actions were ineffective in stopping a run on First Republic Bank FRC, -32.80% of San Francisco's deposits. First Republic was one of the few significant regional U.S. banks whose interest margins had decreased from a year earlier through the fourth quarter.

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The Federal Reserve's new lending facility, along with First Republic's "continued availability of funding through Federal Home Loan Bank [of San Francisco] and ability to access financial support through JPMorgan Chase & Co.," allowed the company to maintain "very strong" liquidity and capital, according to the company after the regulators' actions on March 12.

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The run on First Republic deposits persisted even after all of that. After the bank updated its records to show that between March 10 and March 15, it borrowed money from the Federal Reserve on an overnight basis for amounts ranging from $20 billion to $109 billion at a rate of interest of 4.75%, Jefferies analyst Ken Usdin predicted that "total deposit outflows could have been up to $89 billion" in a note to clients on Friday.

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But the good news was that First Republic will get a $30 billion deposit from a group of major banks led by JPMorgan Chase JPM, -3.78% on Thursday. Many of these same banks experienced a massive rush of deposits as customers and businesses transferred their funds from local banks.

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In a note to clients late on Thursday, Bove stated that it seemed as though the American banking sector was "coming together... to fix the industry's problems," that there would be sufficient money available to avert deposit runs at "any meaningfully sized banks," and that it seemed as though the federal government was "off the hook."

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Bove had anticipated that Royal Bank of Canada RY, -2.74% would redouble its efforts to purchase First Republic in a note on Tuesday.

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Usdin also thinks the bank "may have minus forward profits as a stand-alone entity," which is another reason why "FRC is likely to seek a buyer."

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If you aren't personally impacted, a disastrous financial event may seem far away, but everyone can experience turmoil.

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According to Silicon Valley Bank's holding company's assessment, as of December 31 there were $151.5 billion in uninsured deposits. Many businesses were concerned due to the bank's failure on March 10 and the federal regulators' commitment to protect all deposits on March 12. A Roku Inc. For instance, on March 10 ROKU, -1.44% reported that $487 million, or 26% of its cash, was deposited with SVB, the majority of it uninsured.

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Rafat Ali, CEO and creator of Skift, who first believed that his company "was done," was interviewed by Beth Pinsker. Here is how Ali and his team frantically worked to preserve their company over the weekend following Silicon Valley Bank's failure.

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The Swiss National Bank addressed the liquidity issues Credit Suisse Group AG CS, -6.94% faced with a backstop it announced on Wednesday. On Thursday, Credit Suisse announced that it will use the new facility to borrow around $54 billion.

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Most savers at American banks are presumably content with the $250,000 minimum deposit insurance limit set by the FDIC. But, you might also be shocked to learn that as of December 31, the FDIC calculated that 43% of all U.S. deposits were not covered by insurance. As we have shown, a bank (and its stockholders) may find themselves in trouble very fast if there is such a high percentage of uninsured deposits.

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It turns out that you can have much more than $250,000 guaranteed by the FDIC at a single bank, depending on the how your bank accounts are set up. A method for maximizing your protected deposits is provided by CD Moriarty.

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For banks, higher interest rates are indeed a mixed bag. Compared to the rate of growth for lending rates, the rates the sector has been paying for deposits have increased gradually thus far. According to the FDIC's Quarterly Banking Profile, this is why the total net interest margin of U.S. banks increased to 3.37% in the final quarter from 2.55% a year earlier.

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But, as interest rates increase, bonds' market values automatically decrease. Bank capital levels have been under pressure as a result. It was also a major contributor to the issues at Silicon Valley Bank.

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Hence, following the Federal Open Market Committee meeting on March 21–22, could the Federal Reserve stop raising interest rates?

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As the European Central Bank increased its target range for the federal funds rate by 50 basis points on Thursday, Greg Robb reports that the majority of analysts anticipate the Fed to do the same.