Bank crisis, what to expect according to the analysis of the indices

The risk of a financial crisis

March is looking like the start of a new international financial crisis. All banks are interconnected with each other, so let’s expect contagion that it can take on truly dangerous contours the complexity and capillarity of the financial and banking system. As such, this banking crisis does not appear to be over, and the next couple of months are likely to be fraught with surprises.

Markets are revealing deeper problems with bank balance sheets and/or P&L accounts because there is unwarranted duration risk. Janet Yellen (Secretary of the Treasury) herself said on March 16 (Reuters) that the US banking system remains robust and Americans can feel safe about their deposits but denied that the emergency actions for these bank failures mean there is now a blanket government guarantee for all deposits.

Yellen questioned this policy and warned that many banks may be embroiled in this crisis stemming from the collapse in the value of long-term debt and that any future failures will carry risks similar to those seen at Silicon Valley Bank and Signature Bank. So Yellen talks about “systemic risk”. For the SVB and Signature cases, Yellen said that action was taken because “the chances of contagion that other banks could be considered unsound and suffer capital flight seemed extremely high and the consequences would have been very serious”.

For now, the FDIC insurance limit of $250,000 per depositor remains in effect. The DOW JONES FINANCIAL index chart currently at 673 pt, indicates that the downward thrust will tend to reach 550/500 pts (therefore a further -19% from current levels). Support at 470. As of January 2022, it was 887 points.

The banking sector in Europe

And after looking to the West, let’s look at the situation of the banking sector in Europe, recalling that in addition to the problem of “rising rates”, there are disturbing precedents for the modus operandi of large European banking institutions. Among others, the well-known “Euribor scam” perpetrated for years and which, in 2013, after three years of investigations, led the European Commission to impose billionaire fines on some of the main European banks which had set up a cartel to manipulate the course of the EURIBOR, the reference rate of the quasi all European loans.

Furthermore, an internal investigation (known as Project Teal) by Deutsche Bank had revealed last February as some employees had deliberately circumvented controls to make large profits by selling improper products (derivatives).

And to provide another piece in this complex picture, we recall that just a few months ago, in December, the Bank of England had intervened on the long-term bond market to avoid the worst for several pension funds which were just a few hours away from collapse. In fact, even all pension funds (European, British, American) they have invested in the long-term bond sector and are therefore other subjects at risk (and only some of them have hedged or lightened their positions, focusing on short-term bonds).

The British Central Bank had already underlined the need for regulators in all jurisdictions to strengthen the controls and structure of the sector, stating that “urgent international action is needed to reduce risks in non-bank finance”. In addition, last February an internal investigation (known as Project Teal) of Deutsche Bank found that some employees had deliberately circumvented controls to make large profits by selling inappropriate products (derivatives).

The EUROSTOXX 600 BANKS index closed on Friday at 98.50 points (-8.40% in the single session of Friday 17 March) and is aimed at reaching area 75/68 (-23.40% from current values). The 2020 lows are the natural support. In February it was quoted at 120 points.