Bad vibes alone don’t make a bank run

Meme-ing a regional bank into failure may be more difficult than Silicon Valley Bank’s collapse would suggest.

Regional bank indices are rebounding Friday, after a strong jobs report. KBE is up 5 per cent, PacWest Bancorp has jumped 77 per cent, and Western Alliance is up 36 per cent. (Even PWBK is up a bit. ¯_ (ツ)_/¯)

The irony is that, in theory, the strong jobs numbers should be bad for regional banks; short-dated Treasury yields are climbing, and that means investors can earn more in money-market funds. So depositors have more reason to withdraw idle cash from regional-bank accounts than they did yesterday.

There is another explanation that makes more sense, though. This week has seen truly puzzling levels of bad vibes in bank stocks, and shareholders may now be learning banks’ stock prices aren’t the same thing as their depositor base. And without an actual run on deposits, it is tough to imagine a repeat of a First Republic scenario.

New data from the Fed show little sign of depositor panic during the first three days after First Republic’s failure. For more detail, we can take a look at the relevant section of the Fed’s tables in its weekly H.4.1 report:

As you can see above, US banks’ daily average use of the Fed’s emergency Bank Term Funding Program (or BTFP) ticked up slightly over the week ended May 3.

But since we’re comparing bank-funding stress to regional banks’ share prices, it should be more helpful to compare two discrete points in time: The end of the day Wednesday, compared to one week prior.

During that week, the share price of KRE fell more than 7 per cent, while the volume of loans outstanding at the Fed’s BTFP actually declined a bit. It fell by nearly 7 per cent, to $75.8bn. This is odd, because if banks are truly under stress, they should use the BTFP more, not less.

The Fed’s main discount window (the “primary credit” facility above) also saw its average use decline for the week. And it took a steep dive by May 3, to just $5.3bn from $78.3bn the prior Wednesday. This was almost certainly because of the recategorisation of loans to First Republic as “other credit extensions”, as the Fed explains in its report.

Now, a sceptic could argue that a pickup in regional-banking stress was disguised because banks chose not to use the BTFP or discount window.

Banks’ other financing options include FHLB financing. While we only have a partial picture of Thursday’s issuance, there is little sign of a boom in the incomplete data we do have. The FHLB’s early list of May 4 bond issues adds up to $12.5bn for Thursday, which is a slight pickup in pace from the total $16.6bn sold over the prior three days combined.

A more comprehensive — if slightly more dated — look at FHLB issuance for the week ended May 3 show net paydowns of debt, according to Bank of America’s estimates. And all of this pales in comparison to the $130bn peak in single-day debt issuance in the wake of Silicon Valley Bank’s failure, according to the bank:

There are doubtless some forms of regional-banking problems lurking in the wings, to be sure.

On the credit-quality side, the biggest issue seems to be the banks’ illiquid loans on offices with cratering valuations, but that particular shakeout will take time. And on the funding side of the business, banks are indeed experiencing a drain of deposits from Fed tightening, but it’s a slow and steady one. Short-term yields above 5 per cent only further bolster the popularity of money-market funds as higher-yielding alternatives to checking accounts.

So for now, at least, regional banks’ biggest problems concern long-term profitability and their outlook for capital, not short-term depositor panic.