Kitco News: Banking Sector Collapse Coming, Why It Could Happen in March
While the market is moving towards a calm, seasonal trend higher, there are factors in play that could pose a danger to markets by the spring. 2023 saw a spring selloff amid the second and third largest bank failures in history.
Fortunately, those were quickly contained. The rest of the banking sector has held up well. However, since then, the Federal Reserve has continued to raise interest rates.
So, the increased pressure on the sector could lead to another crisis after the holidays.
One key reason is the end of the Bank Term Funding Program (BTFP). That program was created during this year’s banking crisis. It allows banks who hold U.S. Treasuries to swap them with the Fed for their full face value.
Currently, rising interest rates mean that long-dated bonds are trading well below their face value. That makes this program something of a stealth bailout for the banking sector.
If the program isn’t renewed in the spring, banks may have to issue more shares or debt to ensure ample liquidity. That may not be ideal depending on market conditions. It was that announcement that led to the run on Silicon Valley Bank this year.
In short, the banking sector lives on borrowed time. And that may change in the spring. Investors may want to lighten up on bank stocks out of caution, and look to invest only after a crisis starts to die down.