End of day report March 27th

HIGHLIGHTS

- ECB's Centeno says the pace of QT must be consistent with monetary stance, do not want it to interfere and preserve market functioning
- ECB's Schnabel says balance sheet is expected to decline meaningfully over the coming years
Balance sheet will not return to the levels seen before the global financial crisis.
Balance sheet should only be as large as necessary to ensure sufficient liquidity provision and effectively steer short-term interest rates.
- Fed's Vice-Chair of Supervision Barr says banking system is sound and resilient, recent actions demonstrate we are committed to ensuring all deposits are safe
Prepared to use all our tools for any size institution as needed to keep them safe.
Committed to ensuring Federal Reserve fully accounts for any supervisory or regulatory failings around Silicon Valley Bank.
Has strong capital and liquidity. It appeared that contagion from SVB's failure could be far-reaching and cause damage to the broader banking system.
SVB had inadequate risk management & controls. Supervisors found deficiencies in its liquidity risk management near the end of 2021.
Fed examining whether applying more stringent standards would have prompted SVB to better manage risks. We plan to propose a long-term debt requirement for large banks that are not G-
SIBs, so that they have a cushion of loss-absorbing resources to support their stabilization and allow for resolution in a manner that does not pose systemic risk.
We will need to enhance our stress testing with multiple scenarios so that it captures a wider range of risk and uncovers channels for contagion, like those we saw in the recent series
of events. We must also explore changes to our liquidity rules and other reforms to improve the resiliency of the financial system.
- Goldman Sachs (GS) sees a 35% probability of a US recession within 12 months (prev. saw a 25% chance)
- BoE Governor Bailey says if signs of persistent inflationary pressures become evident, further monetary tightening would be required; with FPC focusing on financial system, the MPC can
focus on returning inflation to target

SUMMARY

A fairly muted day which was highlighted by a lack of further bank failures (!), a deal for SVB, while regulators also consider expanding emergency bank facilities (whatever it takes). As I have menbtioned previously, everything will be fine, as long as nobody looks under the hood. IE, regional banks are responsible for about 40% of the commercial loans (office space etc) and I am pretty sure their portfolios are not going to be marked at current values. With the flight to quality, with a large shift out of banks deposit accounts and into money market accounts that has left the banks with an issue that will probably result in a tightening of financing in the commercial sector. Either the banks raise teir deposit rates or they try to maintain their profits by increasing the rastes on the loans due up for refinancinmg  OR they will have to reduce their asset size to accomnodate the smaller deposit base....and with commercial proerty, not exactly buoyant, all I would say is,"good luck with that"......