Despite the threat of bank runs and a quarter-point interest rate hike by the Federal Reserve, the Standard & Poor’s 500 stock index closed a volatile week with a gain of 1.4%.
The Federal Reserve raised the target range of its benchmark lending rate by 0.25% on Wednesday, despite the sudden onset of bank runs that erupted two weeks ago, when a run by depositors at Silicon Valley Bank spread fears that a banking crisis could destabilize other banks and spread to other banks, destabilizing the U.S. and global economy.
Although fears about deposits at Deutsche Bank, one of Europe’s biggest lenders, sent its stock nosediving by as much as -15% on Friday, its share price loss diminished to -8.5% by the end of the day.
Wall Street’s reaction indicated the threat to banks would be contained, largely thanks to quick action by the Federal Reserve to create a special funding program, according to economist Fritz Meyer. “The Federal Reserve will be offering loans up to one year in length, and the assets against which they're making these loans will be valued at par,” according to Mr. Meyer, an independent economist. “So the Fed has provided the liquidity that any bank, might need if they get a run on their deposits.“
Some banks suddenly faced a liquidity crisis when depositors earlier this month noticed they were short on cash to pay off depositors. Social media posts accelerated their troubles and made depositors withdraw money from accounts in excess of the $250,000 limit on accounts backed by the Federal Deposit Insurance Corporation (FDIC).
A number of banks, such a Silicon Valley Bank, Signature Bank and Silvergate Bank had tied up too much of their depositor assets in long-term bonds and the aggressive rate-raising campaign, which had sent the Federal Reserve’s benchmark lending rate 600% higher in the previous 12 months, decreased the value of their long-term bond holdings. Selling them to satisfy depositor withdrawals would create a bigger financial hole. The Fed’s swift action on March 12 to create the Bank Term Funding Program prevented banks with a mismatch in their long-term holdings versus short-term liquidity needs from falling victim to the same problem.
The S&P 500 stock index closed Friday at 3970.99, up +0.56% from Thursday, and up +1.39% from a week ago. The index is up +77.48 from the March 23, 2020 bear market low and down -17.21 than its January 3, 2022. all-time high.
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