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Navigating the Storm: How Regional Banks Weathered the Crisis and Why the Worst is Behind Them
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What Caused the Regional Banking Crisis?
Eleven months ago, a regional banking crisis in the U.S. dominated the financial news. Initially, the abrupt surge in interest rates led to a swift decline in the worth of regional banking assets. With numerous mortgages issued at bargain basement rates below 4%, the subsequent spike to almost 7% in mortgage rates resulted in a significant devaluation of these previously granted mortgages. Next, two regional banks – Signature Bank of New York, First Republic Bank, and Silicon Valley Bank (SVB) collapsed. To compound the crisis and make matters worse, news of the collapses began to spread fears of an old-fashioned bank run while banks were confronted with the possibility that a large number of their depositors would simultaneously withdraw their funds. Finally, like in 2008, after several banks failed, the U.S. government stepped in via the Federal Deposit Insurance Corporation (FDIC) to protect deposits, fund acquisitions, and bail out the banking sector.
Bank Term Funding Program (BTFP) is Set to Come to an End
The controversial BTFP program is what stabilized these regional banks. The Federal Reserve website describes the program as follows: “The Bank Term Funding Program (BTFP) was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The BTFP offers loans of up to one year offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. The BTFP is an additional source of liquidity against high-quality securities, eliminating and institutions need to quickly sell those securities in times of stress.”
Last week, the Federal Reserve announced that the liquidity protection program will be terminated on March 11th. Does the end of BTFP spell more trouble for regional banks, or is the worst behind the sector? Below are 4 reasons I believe the worst is over for regional banks:
End of BTFP: Bad News is No News
Monitoring the price action of stocks is akin to noticing a subtle but valuable tell in poker. A bullish signal occurs when “Bad news is no news.” Theoretically, the Regional Bank ETF ((KRE - Free Report) ) should have fallen on January 24th when the Fed said they would sunset the BTFP program.
Image Source: TradingView
Market Projects Interest Rate Cuts Ahead
Remember, the root cause of the regional banking crisis is attributed to the unprecedented interest rate hikes by the Fed. The CME FedWatch tool analyzes the probabilities of changes in the Fed rate and U.S. monetary policy using 30-day Fed Funds futures pricing data. The FedWatch tool is pricing in an 82.6% chance that the Fed will cut interest rates as soon as May. Regional banks should rally ahead of time because markets discount the future.
Bullish Price Action
Two bullish clues appear on the KRE chart and charts of some of its top holdings like Zions Bancorp ((ZION - Free Report) ), Truist Financial Corp ((TFC - Free Report) ), and Western Alliance Bancorp ((WAB - Free Report) ), including:
· Golden Cross: Occurs when the 50-day moving average crosses above the 200-day moving average from below. A Golden Cross signal is evidence of a bullish trend change.
· 1st Tag of 10-week Moving Average: The 10-week zone represents an area of favorable reward-to-risk after a robust rally.
Image Source: TradingView
Valuations are Attractive
With the routing that occurred in the industry, several regional banking stocks have valuations at or near historic lows.
Image Source: Zacks Investment Research
Bottom Line
Though the Bank Term Funding Program (BTFB) is ending, there are four reasons to believe the worst is over for regional banking stocks. Look for them to be much higher 12 months from now.
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Navigating the Storm: How Regional Banks Weathered the Crisis and Why the Worst is Behind Them
What Caused the Regional Banking Crisis?
Eleven months ago, a regional banking crisis in the U.S. dominated the financial news. Initially, the abrupt surge in interest rates led to a swift decline in the worth of regional banking assets. With numerous mortgages issued at bargain basement rates below 4%, the subsequent spike to almost 7% in mortgage rates resulted in a significant devaluation of these previously granted mortgages. Next, two regional banks – Signature Bank of New York, First Republic Bank, and Silicon Valley Bank (SVB) collapsed. To compound the crisis and make matters worse, news of the collapses began to spread fears of an old-fashioned bank run while banks were confronted with the possibility that a large number of their depositors would simultaneously withdraw their funds. Finally, like in 2008, after several banks failed, the U.S. government stepped in via the Federal Deposit Insurance Corporation (FDIC) to protect deposits, fund acquisitions, and bail out the banking sector.
Bank Term Funding Program (BTFP) is Set to Come to an End
The controversial BTFP program is what stabilized these regional banks. The Federal Reserve website describes the program as follows: “The Bank Term Funding Program (BTFP) was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The BTFP offers loans of up to one year offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. The BTFP is an additional source of liquidity against high-quality securities, eliminating and institutions need to quickly sell those securities in times of stress.”
Last week, the Federal Reserve announced that the liquidity protection program will be terminated on March 11th. Does the end of BTFP spell more trouble for regional banks, or is the worst behind the sector? Below are 4 reasons I believe the worst is over for regional banks:
End of BTFP: Bad News is No News
Monitoring the price action of stocks is akin to noticing a subtle but valuable tell in poker. A bullish signal occurs when “Bad news is no news.” Theoretically, the Regional Bank ETF ((KRE - Free Report) ) should have fallen on January 24th when the Fed said they would sunset the BTFP program.
Image Source: TradingView
Market Projects Interest Rate Cuts Ahead
Remember, the root cause of the regional banking crisis is attributed to the unprecedented interest rate hikes by the Fed. The CME FedWatch tool analyzes the probabilities of changes in the Fed rate and U.S. monetary policy using 30-day Fed Funds futures pricing data. The FedWatch tool is pricing in an 82.6% chance that the Fed will cut interest rates as soon as May. Regional banks should rally ahead of time because markets discount the future.
Bullish Price Action
Two bullish clues appear on the KRE chart and charts of some of its top holdings like Zions Bancorp ((ZION - Free Report) ), Truist Financial Corp ((TFC - Free Report) ), and Western Alliance Bancorp ((WAB - Free Report) ), including:
· Golden Cross: Occurs when the 50-day moving average crosses above the 200-day moving average from below. A Golden Cross signal is evidence of a bullish trend change.
· 1st Tag of 10-week Moving Average: The 10-week zone represents an area of favorable reward-to-risk after a robust rally.
Image Source: TradingView
Valuations are Attractive
With the routing that occurred in the industry, several regional banking stocks have valuations at or near historic lows.
Image Source: Zacks Investment Research
Bottom Line
Though the Bank Term Funding Program (BTFB) is ending, there are four reasons to believe the worst is over for regional banking stocks. Look for them to be much higher 12 months from now.