Doom Loop Versus Bank Credit Fundamentals; Doom Winning

This commentary reviews the ramifications that depressed stock prices are having on financial stability in the U.S. banking sector.

Key highlights include:

• Despite 1Q23 U.S. bank earnings being generally sound supported by still strong asset quality and higher net interest income, there have been three bank failures following large stock price declines and rapid deposit outflows at these banks.

• Subsequently, more U.S. banks have been in the market cross hairs experiencing substantial equity price declines raising market fears of further bank runs and failures despite many of the pressured banks having solid credit fundamentals.

• Benefitting from being too-big-to-fail, U.S. GSIBs, have generally been beneficiaries of this crisis attracting lower cost funding and whose stock prices have clearly outperformed most smaller banks.

“One short term solution to calm markets would be to bring back the Transaction Account Guarantee Program, which allowed participating banks to fully insure all domestic noninterest-bearing transaction deposits, low-interest NOW accounts, and Interest on Lawyers Trust Accounts (IOLTAs) during the 2008 Financial Crisis,” said Michael Driscoll, Managing Director - Head of NA FIG. “In our view, this would help diminish the market perceived safety advantage for the GSIBs while sustaining competition from smaller U.S. banks.”