Rob Chrisman
Capital markets: dissecting the bank failure
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The collapse of Silicon Valley Bank, attributed to a social media driven run on deposits, has triggered extreme volatility in the Treasury and mortgage-backed security markets, resulting in the most turbulent period since the global financial crisis and in doubling of daily trading volume. Market functioning has held up, but market participants say the turmoil has raised concern about a potential financial accident. Citigroup CEO Jane Fraser has warned that banks and regulators face new challenges in dealing with liquidity issues, as the rise of mobile apps to manage money has accelerated the pace of such events. “It’s a complete game changer from what we’ve seen before,” Fraser said. “There were a couple of tweets and then this thing went down much faster than has happened in history. And frankly I think the regulators did a good job in responding very quickly because normally you have longer to respond to this.”
In testimony before the Senate banking committee, Federal Reserve Vice Chair for Supervision Michael Barr and Federal Deposit Insurance Corp. Chair Martin Gruenberg outlined potential regulatory steps in response to recent bank failures. The proposals could include enhanced banking stress tests, as well as changes to FDIC coverage and “a long-term debt requirement” for banks with assets of $100 billion or more that aren’t categorized as being systemically important.
Fannie’s trading desk reports that, “The Silicon Valley Bank’s ~$90bn securities and Signature Bridge Bank’s ~$28bn securities remain in FDIC receivership. More than 90% of these securities are agency securities. The timing around any FDIC sales is unclear as we’re in unprecedented territory, thus weighing on the pricing action in the deep discount coupons.”
Consumer Financial Protection Bureau Director Rohit Chopra asks, “What if a large mortgage servicer went down?” Speaking this week at the Consumer Bankers Association’s CBA LIVE 2023 event, Chopra said, “A major disruption or failure of a large mortgage servicer really gives me a nightmare,” noting such an event would disrupt households and communities, especially if paired with changes in the macroeconomic environment that hurts the ability of homeowners to pay their mortgages. “We have a lot of interests and are asking a lot of hard questions about mortgage servicing capital liquidity resilience.” IMF pointed out that Chopra said the CFPB is working with the Federal Housing Finance Agency, state regulators, and others to make sure nonbank servicers are resilient. Chopra reminded the audience that the CFPB can designate nonbanks for supervision with requirements on capital and liquidity.
Turning to mortgage rates, there wasn’t much rate movement yesterday despite the overhang of potential MBS FDIC sales from the failed bank portfolios. We learned that consumer expectations for inflation over the next 12 months remain elevated at 6.3 percent. That’s not good news, as the Fed pays close attention to inflationary expectations in consumer confidence surveys. Separately, the forward-looking pending home sales index grew in February for the third consecutive month, according to the National Association of Realtors. However, year-over-year, pending transactions dropped by 21 percent.
Today’s economic calendar kicked off with the final look at Q4 GDP (old news, but core PCE is shown rising 4.4 percent on an annual basis) as well as weekly jobless claims (198k, 1.689 million continuing). Later this morning brings the latest Primary Mortgage Markets Survey from Freddie Mac, with the prior week’s 30-year mortgage rate sliding 18 basis points to 6.42 percent. Three Fed Presidents are scheduled to speak: Boston’s Collins, Richmond’s Barkin, and Minneapolis’ Kashkari. We begin Thursday with Agency MBS prices roughly unchanged and the 10-year yielding 3.56 after closing yesterday at 3.57 percent. (Talk about a “whipsaw,” the 2-year yield, which now is at 4.11, was at 3.55 just a few weeks ago!)
STRATMOR’s Jennifer Smith warns, “What happens to bad rainbows? They go to prism. Don’t worry, though… It’s a light sentence.”
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