Treasury yields, oil prices and stocks have all fallen sharply, along with increased volatility — all signs that investors are fearful of an impending U.S. recession.According to CNBC, Wall Street is currently debating whether the US economy will fall into a recession in a few months. Many economists predict this will happen in the second half of this year. However, the rapid and sharp fluctuations in the market after the bank failures in the US led many strategists to forecast that the economic recession would come sooner. Economists are also lowering their growth forecasts for the US economy as they could see a drop in bank lending.Let’s discover more about the recent bankruptcy and their impact on the whole market in this article below!<h2>2 3 bank failures, market sees tremor</h2><img src="https://cdn.builder.news/news/11edc49e1889f6c08e59028438497b73.jpg" alt="Recent bank failures at historical levels by their balance sheet size" title="Recent bank failures at historical levels by their balance sheet size" width="600" height="303" class="lykafe0">Recent bank failures at historical levels by their balance sheet sizeNumerous insightful analyses have been written about what transpired with the three tech- and venture capital (VC)-friendly banks, Silvergate Bank (SI), Silicon Valley Bank (SIVB), and Signature Bank (SBNY), which were all shut down by the banking authorities over the course of the previous days.The following would be a summary: Poor risk management in the least regulated areas of finance and investment, along with unrealized asset value growing increasingly at odds with fundamental value, have been some effects of 14 years of Fed fund rates standing below 2.5% (and during many of these years close to zero).The vulnerabilities that a decade-long low-rate environment has enabled have been made clear by the US Federal Funds Rate's climb from 0% to 4.5-4.75%. The following issues specifically applied to the three regional banks that failed:<ul><li>On the liability side, concentrated in VC and fund management firms, a significant percentage (or, for SI, the majority of the) exposure to undiversified customer deposits</li><li>A duration mismatch between the asset side, which was invested in long-term US Treasuries, munis, and other MBS securities, and these client deposits (which are redeemable at any time).</li><li>The aforementioned flaws are revealed when customer deposits decrease (a bank run) and must be redeemed by the selling of securities at a recognized loss.</li></ul>Below, you can view a chart that was created by JPM strategist Michael Cembalest. We also encourage you to read his brief essay on the failure of Silicon Valley Bank.The following graphic examines what happens to the Common Equity Tier 1 (the capital that is meant to cover any unanticipated realized loss on a bank's balance sheet) when unrealized losses on securities held by the individual banks are subtracted. Two comments on this graph: 2) US Bank (USB) and Truist (TFC) would have very low CET1 ratios (below 5%) if losses were forced to materialize. Ex-post, SIVB was in a precarious position (e.g. by a bank run). When the FDIC, Fed, and Treasury met this past weekend to discuss what should happen to the uninsured deposits of the collapsed banks, perhaps they had this image in mind. Later, more on this.<img src="https://cdn.builder.news/news/11edc49e188a14688e59028438497b73.jpg" alt="SVIB was especially exposed to unrealized asset losses but other regional banks are also vulnerable" title="SVIB was especially exposed to unrealized asset losses but other regional banks are also vulnerable" width="600" height="315" class="lykafe1">SVIB was especially exposed to unrealized asset losses but other regional banks are also vulnerable<h2>FDIC, Fed, and Treasury announced a bailout package</h2><h3>The how</h3>Following their weekend meeting, the US Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation (FDIC) declared the following:1) Silicon Valley Bank (SIVB) and Signature Bank (SBNY) would "make whole," or make all uninsured deposits (e.g., those exceeding USD $250k) accessible to depositors for a full recovery.<ul><li>SIVB's uninsured deposits are projected to be worth USD 160 billion or more, whereas Signature Bank's are worth USD 79.5 billion (as of December 31, 2022, 89.7% of 88.59 billion in deposits were not FDIC-insured, per the bank's quarterly filings). That amounts to almost USD 240 billion for both banks.</li><li>The funding will be provided by the FDIC's Deposit Insurance Fund, which had a value of USD 128.2 billion as of the end of December 2022.</li><li>Up to 60% of the Deposit Insurance Fund might well be depleted, depending on the actual losses experienced while selling the assets of the two banks; Joseph Wang and other experts predicted a haircut to uninsured deposits ranging from 10% to 30%. (assuming the same magnitude of realized loss at SBNY)</li><li>This suggests that the FDIC will raise the future risk premiums it collects from banks in order to pay for the fund</li><li>(Also, bondholders and equity shareholders of the two banks will suffer the losses)</li></ul>2) For banks that are unable to meet deposit redemptions, a funding facility called the Bank Term Funding Program (BTFP) would be established.<ul><li>For the banks to get finance, the following assets may be pledged at par (ignoring any unrealized losses): Mortgage-backed securities, agency debt, U.S. Treasury securities, and other admissible assets may be used as collateral.</li><li>The Exchange Stabilization Fund, which "only" amounts to $25 billion, is funding the fund (US FX reserves). This fund could be topped off, but only with congressional approval.</li></ul><h3>The why</h3>By boosting public confidence in our financial system, we are taking immediate action today to safeguard the American economy. reads the Treasury, Federal Reserve, and FDIC's introductory statement concerning the announcement of the depositor rescue program. "Confidence" is the essential word here. Contagious bank runs, which would have pushed several regional banks to suffer losses, were the worst-case scenario the three institutions had foreseen (see the second chart of this newsletter).It is psychologically important to emphasize that one of the decision-makers, Fed Chair Powell, encountered a situation similar to this early in his career, teaching him to focus on reducing the risk of contagion over the "moral hazard" (such as negative publicity resulting from the rescue of deserving borrowers); for example, see this anecdote related by WSJ journalist Nick Timiraos.At President Biden's advice, Treasury Secretary Yellen also chose it because 2024 is an election year and any economic contagion would be bad.Last but not least, there is some validity to the worry that the crisis will spread to other local American banks. True, SIVB was an outlier in terms of risk management (ratio of uninsured deposits, allocation to duration, etc.), but based on equity market reactions, the likelihood of a bank running out of fear is not zero for some banks: as of this writing, First Republic Bank's stock is down 78% since today's open after falling 32% over the previous week.Additionally, we see that through its lending activities, Signature Bank had a sizable exposure to commercial real estate. This exposure may have significantly influenced the Fed's decision to provide an extra funding facility.<h2>US policy, economy, and crypto market repercussions</h2><h3>Monetary policy</h3>If three bank failures had not occurred and we were only looking at the macro data, we would continue to believe that the Fed is likely to announce a higher terminal rate (5.50%–5.75%) at its upcoming meeting and boost rates by 50bps:<ul><li>At 10.824 million, job opportunities are progressively declining but surprised on the upside in January, were revised up in December, and are still very nearly at all-time highs.</li><li>The average working week decreased from 34.6 hours to 34.5 hours, while non-farm payrolls fell to 311k from 504k and were revised downward last month. Other data also hint at a slowing of the US labor market. It is now clear how the different industries differ: in February, the technology business lost 25,000 jobs, while leisure and hospitality added 105,000 jobs. If job growth in the leisure sector continues at the current rate, it will reach its pre-2020 staffing level in four months (June report). Ironically, starting in May and continuing through June, the CPI's shelter component should cool (lags from new rents)</li><li>CPI: Under all hypothetical circumstances, taking into account changes in the price of gasoline in March, the headline CPI would be 5.7% YoY. The current consensus is 6.0% YoY.</li></ul><img src="https://cdn.builder.news/news/11edc49e188a4c338e59028438497b73.jpg" alt="Labor market cooling but not enough to satisfy the Fed" title="Labor market cooling but not enough to satisfy the Fed" width="600" height="300" class="lykafe2">Labor market cooling but not enough to satisfy the FedGiven the financial market events following the announcement of the rescue plan, we now see a higher bar for a 50bps rate increase. At the Fed meeting in March, a +25bps increase now seems more likely.&gt;&gt;&gt; Read more:&nbsp;<a href="https://www.builder.news/crypto-insights/how-us-cpi-affects-crypto-market-o87Ba" alt="How US CPI affects crypto market?" title="How US CPI affects crypto market?" target="_blank" rel="" class="">How US CPI affects crypto market?</a><h3>The economy</h3>We anticipate a shift in bank conduct, specifically an intensification of the following actions, which began in Q4 2022:<ul><li>Tightening of lending criteria (the Fed Senior Loan Officer Survey already showed that lending standards for commercial loans were as tight as during the last recession, see our past commentaries)</li><li>Increased deposit rewards, especially at rural banks, to promote stickiness</li><li>An increase in credit loss provisions (already started in Q4 2022, but mainly for credit card loans by the big US banks)</li><li>The aforementioned actions should result in a stronger transmission of monetary tightening to the economy (e.g. more headwinds for the US economy). This should eventually have an impact on inflation, probably with a lag, though (watch shelter CPI in May)</li></ul><img src="https://cdn.builder.news/news/11edc49e188a69318e59028438497b73.jpg" alt="The yield on bank assets less attractive than T-bills" title="The yield on bank assets less attractive than T-bills" width="600" height="374" class="lykafe3">The yield on bank assets less attractive than T-bills<h3>Financial Markets</h3><ul><li>Recessionary trades returned as a result of Fed Chair Powell's statement from last week, which indicated that the terminal rate is likely to be higher than previously thought: The USD, CHF, and JPY all gained strength as a result of the purchase of the US duration.</li><li>The safe-haven currencies, specifically the USD, CHF, and JPY, have been the most robust investments throughout recessions.</li><li>Will duration continue to rise? It would be sensible to estimate the likelihood of this happening (a small one, given the high uncertainty surrounding the inflation developments and the still very tight labor market)</li><li>Therefore, we would anticipate greater risk aversion from equities investors: The risk premium had decreased considerably YTD, but last Friday it increased by 1%pt from February to 6.1%.</li></ul><img src="https://cdn.builder.news/news/11edc49e188ac1bf8e59028438497b73.jpg" alt="The Equity Risk Premium" title="The Equity Risk Premium" width="600" height="302" class="lykafe4"> The Equity Risk Premium had been trending down to a low of ~5% in February, now stands at ~6.1%We would anticipate seeing the following in terms of crypto:<ul><li>Additional stablecoins should be diversified outside of USDC (see LQTY's price trends), at least until there is more regulatory clarification regarding stablecoins versus CBDC.</li></ul><img src="https://cdn.builder.news/news/11edc49e188afeec8e59028438497b73.jpg" alt="Liquity governance token price at the highest level in one year" title="Liquity governance token price at the highest level in one year" width="600" height="296" class="lykafe5">Liquity governance token price at the highest level in one year<img src="https://cdn.builder.news/news/11edc49e188b9a128e59028438497b73.jpg" alt="Smart Money USD balance 7-day most net sold tokens" title="Smart Money USD balance 7-day most net sold tokens" width="600" height="228" class="lykafe6">Smart Money USD balance 7-day most net sold tokens<img src="https://cdn.builder.news/news/11edc49e188bc6628e59028438497b73.jpg" alt="Smart Money USD balance 7-day most net bought tokens" title="Smart Money USD balance 7-day most net bought tokens" width="600" height="209" class="lykafe7">Smart Money USD balance 7-day most net bought tokens<ul><li>There are more exits from crypto to T-bills because to risk aversion, especially from the treasuries of cryptosystems.</li><li>The Crypto Risk Premia for Bitcoin and Ethereum has been risk-off since January and October 2022, respectively, thus it is important to note that our cyclical indicators have not yet turned bullish for the cryptocurrency market.</li></ul><img src="https://cdn.builder.news/news/11edc49e188bde648e59028438497b73.jpg" alt="BTC Crypto Risk Premium reached the exit threshold last in January 2022" title="BTC Crypto Risk Premium reached the exit threshold last in January 2022" width="600" height="164" class="lykafe8">BTC Crypto Risk Premium reached the exit threshold last in January 2022<img src="https://cdn.builder.news/news/11edc49e188be3cb8e59028438497b73.jpg" alt="ETH Crypto Risk Premium reached the exit threshold last in October 2022" title="ETH Crypto Risk Premium reached the exit threshold last in October 2022" width="600" height="162" class="lykafe9">ETH Crypto Risk Premium reached the exit threshold last in October 2022<h2>Closing thoughts</h2>Many people believe that a series of bank failures this time will lead to a great recession like the 2008 Lehman Brothers incident. Along with that, inflation has not shown any signs of slowing down.Immediately after the market-shaking collapse of 3 banks, the Fed reassured users through bank bailouts, which led to people's assets being safe. However, the Fed turned around the day after and announced that it would reevaluate its oversight of the Silicon Valley Bank. "It's important to be humble and conduct a careful and thorough review of how to oversee and regulate this bank and what should learn from this experience.”Although the steps taken by US authorities on March 12 marked the most extensive government intervention in the banking system since the 2008 financial crisis, they have been relatively limited in terms of financial resources. compared to 15 years ago. Bankruptcy banks themselves are not bailed out.<div class="pr-block-special">Disclaimer: This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

The failure of three banks has sent shockwaves across the globe. With the onset of stronger regulation following the financial crisis of 2008, it has been the largest failure.

Market reassessment: US policy and the consequences of bankruptcy