Charts of the week: The Fed balance sheet grows, CoCos turn risky, and the outlook for real estate
This week’s charts cover the following data:
Slicing up the emergency balance sheet expansion at the Fed
The Silicon Valley Bank crisis prompted a sharp reversal of the Federal Reserve’s effort to shrink its balance sheet. The Fed had been letting securities mature for months, gradually reducing the stockpile of bonds accumulated during waves of quantitative easing.
In just two weeks, the balance sheet expanded by more than USD 339 billion. This pie chart breaks down that increase and its two main components: the bail out of depositors and last-resort lending.
About USD 180 billion was loaned to the Federal Deposit Insurance Corporation, classified under "Other Credit Extensions." Traditionally, the FDIC borrows from the Treasury; however, the Fed stepped in amid the current?political standoff over the debt ceiling.
Primary Credit jumped by USD 105 billion due to lending through the "discount window," normally a last-resort funding source. This topped the weekly peak in 2008, reflecting the stress on banks’ funding as higher rates pressure their fixed-income assets.?
The Bank Term Funding Program grabbed the headlines; this limited-time, emergency facility provides liquidity to banks. It’s been a relatively small slice of the pie so far, accounting for about USD 53 billion.
Credit Suisse CoCo wipeout sends AT1 yields soaring
The emergency takeover of Credit Suisse by its domestic rival UBS sent shockwaves through a particular securities market: Additional Tier 1 bonds, known as AT1 or CoCos (contingent convertible bonds).
AT1 securities were created in Europe after the 2008 financial crisis to bolster banks’ capital and shift risk away from taxpayers.
Controversially, Swiss regulators ordered that Credit Suisse’s AT1 holders be wiped out as part of the rescue, in contrast to equity holders (like the Saudi National Bank) that received small payouts from UBS as part of the deal.
Our chart shows the impact on the USD 250 billion CoCo market. Yields have soared, tripling from their lows, as these instruments are now perceived as much riskier. The second panel shows that the ICE BofAML benchmark has slumped about 20 percent from its pandemic peak.
Some of the Credit Suisse AT1 holders are considering legal action; meanwhile, EU?regulators have attempted to calm the market, saying?that equity holders should be first to absorb losses before AT1s are written down.
The following chart requires a subscription to the ICE BofAML add-on database.
Visualising a risk dashboard for banking turmoil
With the banking industry unsettled on both sides of the Atlantic, we have created a visualisation of the European Banking Authority’s risk dashboard that can be toggled between different countries.
Each quarter, the EBA publishes a broad range of risk indicators for the banking system. These include capital strength metrics (like CET1 ratios), measures of non-performing loans, and profitability.
Our table includes data up to the third quarter of last year, so it will be some time before it reflects this quarter’s turmoil. It uses the EBA’s own green-yellow-red “traffic light” thresholds for good, intermediate and bad readings.
In the case of Germany, the picture was mixed two quarters ago. Profitability metrics and liquidity capabilities were poor, but banks had strong solvency ratios and asset quality.
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Tip: this chart allows for the?change region?function.
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Macrobond News
Replay our latest webinar: Real estate in a time of rising rates – navigating the correction, anticipating the opportunity
Real estate is among the most sensitive assets to interest rates. With the world’s central banks well into a historic tightening cycle, what happens to one of the most widely held asset classes?
Liam Bailey, global head of research at Knight Frank,?Carl Gomez, chief economist and head of market analytics at CoStar Group, and?Simon Wallace, global co-head of real estate research and strategy at DWS Group, discussed the cloudy outlook and potential opportunities in selective sectors.
And read more customers’ outlooks on real estate
Expert members of the Macrobond community discuss waiting for the right buying opportunity, the challenge of constrained bank funding, and opportunities in social housing and build-to-rent sectors. They also weigh whether renovating old office properties to make them ESG-certified is worth the expense.
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