The banking sector is still uneasy

While bankers no doubt rejoiced after the US Federal Reserve signalled it would move to pause rate hikes, the sector is still full of more tension than the final season of Succession.  

Driving the news: After the failure of First Republic on Monday, there was some temporary panic around the financial health of other US regional banks that are considered vulnerable.

  • On Tuesday, the KBW Bank Index fell by 5.52% to its lowest since December 2020, with lenders PacWest and Western Alliance facing the brunt of share sell-offs.

Regional bank shares have shown a slight recovery since then, but the sector is still uneasy, with Bank of America analysts warning that “a persistent sell-off in stocks has the potential to inform deposit customer behaviour and worsen [certain banks’] profitability challenges.”

Why it matters: Canadian banks aren’t in the clear, either. Last quarter, the four Canuck banks with substantial US operations (TD, RBC, CIBC, and BMO), on average, saw deposits drop 3% quarter-over-quarter—right in line with what US banks have experienced. 

  • TD took the biggest hit, with deposits dropping 5%, in part because of its exposure to  financial services giant Charles Schwab, which hasn’t been doing too hot lately.
  • We’ll have to wait for banks to report earnings later this month to get a full picture, since the data drawn from regulatory filings do include some accounting differences.

Zoom out: With Jamie Dimon saying the crisis is nearly over, and Joe Biden declaring the system is “safe and sound” thanks to robust mechanisms keeping things in check, the vibes are cautiously optimistic, although another regional bank failure isn’t out of the question.

Ultimately, this hoopla could actually be a net positive, per Scotiabank’s Derek Holt, if it ends up forcing the US to revamp its archaic banking system riddled with too many small banks.