One way to calculate how much the ongoing banking crisis corresponds to in Fed hikes is to look at how much borrowing costs have increased for regional banks and money center banks since Silicon Valley Bank collapsed.
The chart below shows that since SVB failed, IG credit spreads for regional banks have widened 200bps and for diversified banks 50bps.
And for all banks, the spread widening has stayed at a new higher level because many banks have been downgraded. Spreads first moved up to a higher level after SVB and then another higher level after FRC, showing that the ongoing banking crisis is having a permanent negative effect on the economy.
Put differently, the increase in borrowing costs since SVB failed corresponds to a 200bps permanent Fed hike for regional banks and 50bps permanent Fed hike for large banks. Weighing these estimates together using the shares of loans and leases accounted for by small and large banks, respectively, gives an economy-wide Fed tightening of a bit more than 100bps for the entire banking sector.
In short, the jump in funding costs for banks is permanent, and it has become a lot more expensive for many banks to run their business, and the banking crisis is not over.
Source: ICE BofA, Bloomberg, Apollo Chief Economist. Note: Unweighted average spreads of bonds from ICE 5-10 Year US Banking Index, C6PX Index for bonds issued before 1st Jan 2023. There are 8 banks in the Regional index and 41 banks in the Diversified index. Regional banks include BankUnited, Citizens Financial, Huntington, and Zions. Diversified banks include JP Morgan, Citibank, and Bank of America.
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