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The divergence between the Fed funds rate and interest rates on checking accounts is the fundamental reason why money is being moved out of bank deposits and into higher-yielding investments, including money market accounts, see charts below. Higher rates as a source of instability for deposits and Treasury holdings are highly unusual compared to previous banking crises, where the source of instability has typically been credit losses putting downward pressure on the illiquid side of banks’ balance sheets.
Source: FRB, RateWatch, Haver Analytics, Apollo Chief Economist 
Source: Bloomberg See important disclaimers at the bottom of the page.
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Today at 4:15 pm, we get data from the Fed showing what happened to deposits and lending in small banks the week after SVB went under. The weekly H8 data can be found here, and it shows that deposits were already declining for both small and large banks in the weeks leading up to SVB’s failure, see chart below. Once the data is out we will update our weekly banking sector chart book and send it out over the weekend.
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since SVB went under, there has been basically no HY issuance, IG issuance, or IPO activity, see chart below. And completed M&A activity since Friday, March 10 reflects long-time planned M&A rather than new risk-taking. The longer capital markets are closed, and the longer funding spreads for banks remain elevated, the more negative the impact will be on the broader economy.
Source: Pitchbook LCD, S&P Capital IQ, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The University of Michigan asks consumers about credit conditions, and the chart below shows that even before the SVB situation, credit conditions had tightened to levels last seen in 2008, see chart below.
Source: University of Michigan, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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SVB is likely to have a more negative impact on the economy than Orange County, LTCM, and the UK LDI episode because what happened with SVB will change the behavior of regional banks.
Most importantly, the costs of capital have increased, and underwriting standards have tightened.
Our updated outlook for credit markets is available here.
Source: ICE BofA, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the Fed began to raise interest rates a year ago, the amount of money in money market funds has increased by roughly $400bn, and the inflows increased by more than $100bn last week, see chart below.
Source: Bloomberg See important disclaimers at the bottom of the page.
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Regional banks are impacted by higher funding costs, deposit risks, regulatory pressures, and asset declines, including future credit losses from the lagged effects of Fed hikes, and these forces combined are likely to result in tighter credit conditions. Our weekly banking sector chart book is available here, key charts inserted below.
Source: Apollo Chief Economist. Represents the views and opinions of Apollo’s Chief Economist. Subject to change at any time without notice. 
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist 
Source: Bloomberg. Note: Ticker used USFOSC1 BGN Currency. As of March 13, 2023. 
Source: Bloomberg. Note: Ticker used USFOSC1 BGN Currency. As of March 13, 2023. 
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist 
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist 
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist 
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist 
Source: FRB, RateWatch, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Quantifying the impact of tighter financial conditions plus tighter lending standards, we estimate that the events this past week correspond to a 1.5% increase in the Fed funds rate. In other words, over the past week, monetary conditions have tightened to a degree where the risks of a sharper slowdown in the economy have increased.
Source: Bloomberg, Apollo Chief Economist. Note: Two regression models with the Fed funds rate on the left-hand side were run to quantify the effect from tighter financial conditions and tighter lending standards, and the estimated coefficients show 0.5% higher Fed funds rate from tighter financial conditions and 1% higher Fed funds rate from tighter lending standards. See important disclaimers at the bottom of the page.
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The Worker Adjustment and Retraining Notification (WARN) Act gives 60 to 90 days advance notice in cases of plant closings and mass layoffs. Looking at WARN notices for CA, FL, NY, OH, PA, and TX shows upside risks to jobless claims over the coming weeks, see chart below.
Source: Department of Labor, Haver Analytics, Federal Reserve Bank of Cleveland, Apollo Chief Economist. Note: The Worker Adjustment and Retraining Notification (WARN) Act helps ensure 60 to 90 days advance notice in cases of qualified plant closings and mass layoffs. WARN notices summed for CA, FL, NY, OH, PA, TX. See important disclaimers at the bottom of the page.
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Looking ahead, investors will need to monitor what is going on in regional banks with deposits and lending to consumers and lending to corporates. Once a week, when the Fed data for the banking sector is out, we will update and send out a chart book to monitor the situation.
See important disclaimers at the bottom of the page.
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