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Time to Bottom Fish Bank ETFs As Collapse Will Subside?

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By now, we all know that the U.S. economy is going through a crisis triggered by its regional banking sector that started in early March.The collapse of three U.S. regional banks since March and the likely failure of two more (Pacific Western Bank and Western Alliance) have raised fears of a volley of bank failures.

A study on the U.S. banking system found that 186 more banks are at risk of failure, with uninsured depositors potentially withdrawing their funds. The fragility of the banking system highlights concerns about regulatory oversight and systemic risk, and regulators must ensure effective risk management to mitigate these risks.

Why Did the Crash Come?

It all depends on the Fed’s actions. Investors should note that the bank run started on Mar 9, after the Silicon Valley Bank’s (SVB) strategic update to investors revealed that it had sold substantially all of its Available for Sale securities portfolio of $21 billion, most of which were U.S. treasury bonds. SVB had locked these treasuries at a yield of 1.79% and had to book a loss of $1.8 billion on this transaction due to a spike in rates past year.

Most banks did the same as SVB. As start-up clients withdrew deposits to sustain their companies in a challenging climate for IPOs and private fundraising, banks found themselves short on capital. So, all in all, the much higher rates — that too in such a short span due to steep and fast Fed rate hikes — indirectly caused a long-feared crisis in the market and economy. Maybe, smaller banks felt the heat first for holding low-yielding treasury bonds. But the fact is that big banks, too, have held it.

So, the journey from here is dependent on the Fed’s moves. If the Fed acts less hawkish or dovish in the coming days, we could see a rally in regional banking ETFs. A less-hawkish Fed should boost investing in growth sectors like technology. Then, regional banks exposed to the small-cap tech sector or tech start-ups should not face much of the crisis. Not only that, several other sectors like real estate and homebuilding should prosper in a low-rate environment and not pose any threat to regional banks.

Jeffrey Gundlach, the billionaire co-founder and CEO of DoubleLine Capital, told CNBC lately that he’s definitely “turning more bearish” after the Fed decided to raise rates despite regional banks’ latest issues, per a Fortune article, as quoted on Yahoo Finance. “Leaving rates this high is going to continue this stress. I believe with a very high degree of probability there’s going to be further regional bank failures,” he cautioned.

How to Withstand the Blow?

The Federal Deposit Insurance Corp’s (FDIC) retaining of those securities would safeguard the acquirers from not booking a loss on them. FDIC has to play a crucial part in retaining global investors’ confidence in the banking system. Big banks like J.P. Morgan also have to support the government’s rescue operation.

In late March, U.S. Treasury Secretary Janet Yellen hinted at considerable U.S. government backing for deposits at smaller American banks, should the need be. Yellen said that guarantees offered to all depositors at the failed Silicon Valley Bank could be replicated at other institutions, if required.

The dust in the banking crisis will settle only if the Fed slows down, which the central bank will likely do in the coming meetings. Shares of the regional banks rebounded sharply last Friday. However, the recovery was not enough to cover the losses triggered after the collapse of First Republic.

Time to Bottom Fish Regional Bank ETFs?

If you are a long-term investor, you can bet on regional bank ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , iShares U.S. Regional Banks ETF (IAT - Free Report) and Invesco KBW Regional Banking ETF (KBWR - Free Report) . These ETFs are down about 30% this year. Once the chaos settles down, these could bounce back with an immense force. Single stock picking is currently tough in the regional banking space. Hence, one should go for the ETF approach.

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