Banking Crisis Receding

Major stock market indexes gapped up at the open this morning, following through on a rally that began last Wednesday. Banks are outperforming as fear subsides. Bonds, which caught a bid last week on increased recession fears, are selling off today.

As expected, the Federal Reserve raised its short-term policy interest rate by .25% last week. That brings the Fed funds rate target to 5.0%, the highest since September 2007. The accompanying statement acknowledged recent stress in the banking system, implying that the Fed would tread lightly with further monetary tightening. That’s good news.

The banking crisis may be receding. After coming to the rescue of Silicon Valley Bank depositors but then oddly stating that the government would only backstop “systemically important” banks, Treasury Secretary Janet Yellen revised her message with a pledge for “additional deposit actions if warranted.” And today, Bloomberg reported that officials are considering expanding an emergency lending facility for banks in trouble (i.e. First Republic Bank). Finally, it looks like First Citizens BancShares (FCNCA) has agreed to buy Silicon Valley Bank. This would be a win-win for everyone.

Even so, the recent banking crisis will certainly have an impact on availability of credit. A Federal Reserve loan officer survey revealed 45% of banks are tightening lending standards, especially in commercial and industrial loans. Critically, however, mortgage lending standards remain mostly unchanged. But the point is that economic growth could suffer if banks are less willing to lend.