2023 Banking Crisis

US By the Numbers
6 April 2023 Dana M Peterson (ESF) and Mitchell Barnes (CED)

Place cover photo here

1 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 2023 Banking Crisis

▪ Insights for What’s Ahead

✓ The worst of the banking crisis appears to be over, but some stress in financial markets remains.
✓ Banks are still borrowing from the Fed to remain liquid, although it appears to be stabilizing. Money being withdrawn
from the FDIC has fallen from a daily average of nearly $70 billion to just $5 billion. Outflows of deposits from small
banks to large banks or various financial assets seems to have paused.
✓ Policymakers are considering a variety of proposed changes for medium-sized banks, deposit insurance, and regulatory
scrutiny. Reaching consensus on action in a divided Congress will be difficult unless the crisis were to deepen. But
congressional investigations of the failures are the first order of business. Regulators are examining whether stricter
regulations should be reimposed on banks having assets between $100 billion and $250 billion. There is bipartisan
interest in considering proposals to protect small and medium sized banks, including increasing the amount of insurance
for deposits. Regulators are undergoing reviews to search for failures in oversight.
✓ So far, credit spreads remain narrow, and liquidity appears to be adequate. Still, the Fed anticipates some tightening in
financial conditions (akin to a 25-basis point interest rate hike) due to the banking crisis. Businesses, small and large,
may be more affected than consumers, who have already pulled back on big-ticket items requiring financing.
✓ Other shoes to drop might include difficulty for corporations to obtain cash from either banks or capital markets.
Additionally, CRE loan defaults may place added stress on banks at a delicate time.
✓ Against this backdrop, The Conference Board continues to anticipate two more Fed interest rate hikes as the banking
crisis appears under control, but inflation remains uncomfortably high. The Fed’s tighter monetary policy is likely to
induce a short and shallow recession, potentially starting in 2Q 2023, that results in some weakening in a fairly robust
labor market. Source: The Conference Board.

2 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 2023 Banking Crisis
What Happened?
▪ SVB and Signature Bank Failure Causes
✓ Drained deposits
✓ Shrinking net interest margin
✓ Mismatched durations of assets to liabilities
✓ Industry (i.e., tech sector) concentration exposure
✓ Poor internal risk controls (liquidity)
▪ Institutions Rescued
✓ SVB, Signature Bank (US)
✓ First Republic Bank (US)
✓ Credit Suisse (Switzerland)
▪ Rescuers
✓ FDIC
✓ FED, Swiss National Bank
✓ White House
✓ Large Banks Source: The Conference Board.

3 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 2023 Banking Crisis
Actions of US Regulators and the Central Bank
▪ Systemic Risk Exceptions for SVB and Signature
✓ Allowed FDIC to backstop uninsured depositors
✓ Both banks taken into FDIC receivership; FDIC coordinated sales to First Citizens Bank and to
Flagstar Bank
✓ Estimated loss to FDIC fund of $22.5B; to be made up by special assessment fee on banks

▪ Fed Liquidity Injections

✓ Fed established new Bank Term Funding Program to allow banks access to one-year loans
collateralized by government debt securities recognized at par value
✓ Fed coordinated with 5 other central banks to enhance provision of US dollar liquidity swaps through
at least the end of April

Source: The Conference Board.

4 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 2023 Banking Crisis
Legislative and Regulatory Considerations and Future Actions
▪ Capital and Liquidity Rules
✓ Progressive lawmakers have proposed rescinding the 2018 law that exempted banks between
$100B-$250B in assets from certain liquidity, stress test, and resolution planning requirements
✓ Supported by White House and Fed, FDIC, and Treasury regulators in testimony to Congress
✓ Proposed regulatory changes face challenge in Republican-controlled House

▪ FDIC Insurance
✓ Bipartisan concern about viability of small and medium sized banks, including interest behind
revisiting FDIC deposit insurance limits; no formal proposal yet
✓ Considerations include raising $250,000 limit or applying different treatment to business deposits
✓ Pushed for by trade groups representing community and regional banks

▪ Accountability and Regulator Reviews

✓ Internal reviews from Fed and FDIC both to be released by May 1; separate reviews being
conducted by SEC and DOJ
✓ Many lawmakers have objected to regulatory changes before fact-finding complete
Source: The Conference Board.

5 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Stock Volatility Low

▪ The banking crisis notwithstanding, stock

market volatility has remained low compared
to the start of the pandemic shutdowns in
2020 and the UK pension crisis of 2022.

Sources: Chicago Board of Options Exchange and The Conference Board.

6 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Bank Stocks Bottoming

▪ Most of the damage to the stock market was

for banking stocks, which tumbled amid the
banking crisis.
▪ However, recent data suggest that banking
stocks are bottoming and the stock market
on aggregate is recovering from the crisis
swoon

Sources: S&P and The Conference Board.

7 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Bond Market Calming

▪ Most of the volatility was in bond markets, as

indicated by the MOVE index.
▪ This largely reflected investor flight to safety
(i.e., US Treasury securities) as banking
stocks convulsed and panic set in.
▪ In recent days and due to the quick
response of regulators, central banks, and
large banking institutions to contain the
crisis, bond markets are calming.

Sources: BoA / Merrill Lynch and The Conference Board.

8 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Liquidity Swaps Stable

▪ To ensure the availability of US dollars

abroad, the Fed along with five other central
banks established liquidity swap facilities.
▪ To-date there is been little if any activity with
these swap lines, signaling that there have
not been tremendous difficulties accessing
dollars.
▪ Additionally, after a brief rally in the weeks
just after the crisis, the US dollar has
returned to its depreciating trend triggered
by investor belief the Fed is close to ending
its interest rate tightening cycle.
▪ A cheaper dollar is beneficial for economies
with floating exchange rates as it cuts
inflation.
Sources: Federal Reserve Bank of New York and The Conference Board.

9 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Fed Lending to Banks Astounding

▪ As in prior crises – The Great Financial

Crisis/Great Recession and the most recent
pandemic – the Federal Reserve has
stepped in to provide liquidity to financial
markets, businesses and consumers.
▪ Instruments the Fed has used include credit
to depository institutions (i.e., banks),
primary dealers, mutual funds, the paycheck
protection program, commercial paper,
corporates large and small, and the latest
the Bank Term Funding Program (BTFP).

Sources: Federal Reserve Board and The Conference Board.

10 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Fed Lending to Banks Astounding

▪ Amid the 2023 Banking Crisis, the Fed is

mostly extending loans via its credit to
primary depository institutions, the BTFP,
and “other credit extensions,” which include
direct cash to institutions.
▪ Cash injections of cash and loans to banks
by the Fed surged in the first two weeks of
the crisis, but appeared to stabilize in the
most recent weeks

Sources: Federal Reserve Board and The Conference Board.

11 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Net Effect of Liquidity Provision Growing Fed Balance Sheet

Sources: Federal Reserve Board and The Conference Board. Sources: Federal Reserve Board and The Conference Board.

12 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Money Moving

▪ The banking crisis sparked withdrawals of

deposits from small domestic commercial
banks to other locations.
▪ Anecdotally, some of the money is being
funneled into large commercial banks.
▪ Anecdotally, some money is flowing into
money market funds, high yield savings
accounts, certificates of deposits, and US
Treasury securities.
▪ These assets can be issued by banks or
non-bank financial institutions.
▪ Money flowing to large banks raises the
concern about making SIFIs or “too-big-to-
fail” banks even larger.*
Sources: Federal Reserve Board and The Conference Board. * SIFIs – Systemically Important Financial Institutions

13 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Money Moving

▪ An outsized amount of cash ($300 billion) is

moving into money market funds since the
bank crisis started, some of which are
issued by banks others by non-bank
financial institutions.

Sources: Investment Company Institute and The Conference Board.

14 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – FDIC Withdrawals Outsized Initially But Now Cooling

▪ Cash withdrawals from the FDIC spiked toa

daily average of $69 billion but have
dropped to just $5 billion in recent days.

Sources: U.S. Treasury and The Conference Board.

15 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Global Funding Stress Low

▪ The swift actions of central banks,

regulators, and large banks – both in the US
and Switzerland – has kept a broad measure
of global financial stress low.
▪ The funding component of the Office of
Financial Research Global Financial Stress
Index, which measures liquidity stress,
remains just below the average level.

Sources: Office of Financial Research and The Conference Board.

16 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Systemic Stress is Elevated But Headed Lower

▪ The European Central Bank’s measure of

systemic stress for the United States surged
to levels seen during the 2022 UK pension
crisis but has started to ease as panic
recedes.

Sources: European Central Bank and The Conference Board.

17 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Credit Slowing Before Bank Crisis May Accelerate
▪ At the March FOMC meeting, Fed officials
chose to continue dialing down the assets
on the balance sheets and raise interest
rates by another 25 basis points.
▪ This was a signal that the Fed could
effectively do two things at once: 1) address
inflation through the credit channel (i.e.,
interest rates and “quantitative easing;” and
2) provide liquidity to struggling US banks
with loans via its other facilities.
▪ Nonetheless, Fed officials said the banking
crisis (i.e., banks’ fears of declining deposits)
might result in less lending to firms and
consumers.
▪ Domestically chartered banks were already
limiting loans before the banking crisis amid
Sources: Federal Reserve Board and The Conference Board. rapidly rising interest rates
18 © 2023 The Conference Board, Inc. | ConferenceBoard.org
 Banking Crisis Effect – Foreign Bank Credit to Consumers Halted in 2022

▪ Foreign banking institutions operating in the

US were also slowing commercial and real
estate lending before the banking crisis.
▪ Foreign banking institutions operating in the
US stopped lending to US consumers
shortly after the Fed began raising interest
rates in March 2022.

Sources: Federal Reserve Board and The Conference Board. Sources: Federal Reserve Board and The Conference Board.

19 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Spending on Durable Goods Slowing Before Bank Crisis

▪ Consumers spent copiously on goods during

the pandemic during lockdowns and as they
received cash injections from fiscal stimulus.
▪ Now that lockdowns have ended, consumers
are spending less on durable goods, which
are often big-ticket items needing financing,
and more on services, which are less likely
to be financed.
▪ The slower goods consumption predated the
banking crisis.
▪ The more balanced demand between goods
and services suggests consumers may not
suffer as much from banks withholding
lending.
Sources: Bureau of Economic Analysis and The Conference Board.

20 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Durable Goods Spending Slowing Before Bank Crisis

▪ Month-over-month consumer spending data

reveals that household consumption of
durable goods was negative in three of the
last four months.
▪ The January spike in consumption in general
likely reflected generally favorable weather
in the US.

Sources: Bureau of Economic Analysis and The Conference Board.

21 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Residential Investment Slowing Before Bank Crisis

▪ Mortgage rates have already risen to 23-

year highs as the Fed raised interest rates
quickly and aggressively over the last year
to force consumer inflation gauges back to
the 2-percent target.
▪ Mortgage rates have only ticked a hair lower
amid the banking crisis.

Sources: Federal Home Loan Mortgage Corporation and The Conference Board. Sources: Bureau of Economic Analysis and The Conference Board.

22 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Residential Investment Slowing Before Bank Crisis

▪ Consumers already pulled back on home

purchases before the banking crisis as the
Fed had raised the federal funds rate target
to almost 5 percent.
▪ New and existing home sales collapsed,
home price valuations are declining in some
regions, and construction has ebbed.
▪ Consequently, real residential investment in
structures has plummeted from the
pandemic-era peak.

Sources: Federal Home Loan Mortgage Corporation and The Conference Board. Sources: Bureau of Economic Analysis and The Conference Board.

23 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Corporate Debt Spreads Remain Narrow, But Watch
the Levels
▪ Spreads of corporate investment grade and high-yield debt to US Treasury securities remain
narrow.
▪ Spreads of different types of commercial paper to the federal funds rate also remain narrow.
▪ These are signs that there are not material strains on businesses or corporation’s ability to
borrow over the short-term.
▪ However, it is important to keep an eye on the levels of debt and liquidity, as cash could dry up
quickly in a panic and stress business operations and swell corporate bond yields
▪ This very scenario occurred during the Great Financial Crisis, suggesting corporations may wish
to be conservative with their balance sheets and hold more cash until the financial market
backdrop improves.

24 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Corporate Spreads Narrow

Sources: ICE/Bank of America Merrill Lynch and The Conference Board. Sources: ICE/Bank of America Merrill Lynch and The Conference Board.

25 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Commercial Paper Spreads Narrow

Sources: Federal Reserve Board and The Conference Board.

26 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Business Investment Likely to Slow

▪ Business investment after adjusting for

inflation has been ebbing (IP, equipment) or
negative since 2021’s peak.
▪ The Fed’s rate hikes were contributing to the
slowing ahead of the banking crisis.
▪ However, the divestment may be
accelerated because of the banking crisis.
▪ As banks borrow money from the Fed to
remain liquid, they are unlikely to provide
much credit (short- or long-term) credit to
businesses.
▪ Hence, we posit the impact of tightening
financial conditions caused by the banking
crisis may be more acute for firms than for
Sources: Bureau of Economic Analysis and The Conference Board.
households.

27 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Market Expectations Accelerated Rate Cut Path

▪ Fed officials estimate that the net effect of

the banking crisis on financial conditions
tightening would be approximately
equivalent to one 25 basis point rate hike.
▪ Potentially this is reflected in the roughly 25
basis point narrowing in the expected
increase in the fed funds rate at the May
FOMC meeting.
▪ Markets are also pricing in rate cuts
sometime in 3Q 2023 in the wake of the
banking crisis, potentially in greater
anticipation of a recession than before the
crisis began.

Sources: Bloomberg and The Conference Board.

28 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – Market Expectations
▪ The 2yr-10yr yield curve became less
inverted when the banking crisis began, as
markets priced in fewer interest rate hikes in
the very near term and interest rate cuts as
soon as 3Q 2023.
▪ Treasuries yields also flagged amid flight to
safety: investors gobbled up US Treasuries
to park their cash in a relatively safe place
which raised the price but lowered the yield.
▪ Nonetheless, the yield curve remains
inverted, which is one among many signs
that investors anticipate a recession ahead.
▪ The Conference Board® US Leading
Economic Index™, which includes an
inverted yield curve, suggests a recession
may begin in short order.
Sources: US Treasury and The Conference Board.

29 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 Banking Crisis Effect – The Next Shoe to Drop?

▪ US domestically chartered banks hold nearly

60 percent of commercial real estate (CRE)
loans.
▪ Empty offices due to the pandemic and
hybrid work, and stalling in residential real
estate spend, which often draws CRE
investment, as interest rates rise, are
weighing on the CRE market.
▪ Defaults on CRE loans are on the rise
stoking concerns that this might negatively
impact US banks at a vulnerable time.

Sources: Federal Reserve Board and The Conference Board.

30 © 2023 The Conference Board, Inc. | ConferenceBoard.org

 The Conference Board

CED / Public Economy, Environment, Human Marketing &

Policy Strategy & Social & Capital Communications
Finance Governance

Economy, Strategy & Finance (ESF) Center

Regine Medor Vincent Vacanti

Dana Peterson
Member Engagement Member Engagement
Center Leader, EVP &
Director Associate
Global Chief Economist
Regine.Medor@conference- Vincent.Vacanti@conference-
dana.peterson@conference-
board.org board.org
board.org
+1 737 249 0688 +1 212 339 0493
+1 212 339 0352

31 © 2023 The Conference Board, Inc. | ConferenceBoard.org