While the market was surprised by the stronger-than-expected U.S. economic data like jobs, the Purchasing Managers’ Index (PMI), and CPI, a run on the Silicon Valley Bank occurred resulted in its collapse. Ironically, some analysts were recommending banking stocks based on their interest rate hike argument. It turns out that the prices of these stocks plummeted. They seemed naïve to the extent of not knowing how banks make money. By construction, banks borrow short and lend long. The prolonged and worsening inverted yield curve has suggested banks are losers.
Even though banks’ profits rely heavily on fee income nowadays, their clients make money by exploiting returns from holding longer-tenor (term) products. If short-tenor returns are exceptionally high, as in recent days, clients would sit on cash, and banks would have no room to profit from fee income. Given that banks and their clients’ profits align, propriety trading (selling bonds and the like) is probably the only significant revenue source independent of the long-short yield gap. Yet this usually takes up a small share of total revenue….
Bank Failures and Recession Ahead