Stricter rules for banks after SVB collapse?

Senator Tim Scott, RS.C., right, greets Michael Barr, off-camera, Vice Chairman for Oversight of the Board of Governors of the Federal Reserve System, at the Dirksen Building on Tuesday, March 28, 2023.

Tom Williams | Cq-roll Call, Inc. | Getty Images

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Banks may be regulated more strictly in the future, if regulators have their way.

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If you squint a bit, Tuesday looks like a “normal” trading day – almost. That is, US markets yesterday were worried about inflation and interest rate fears, not a banking crisis.

The most important news of the day was, of course, the hearing in the Senate on the bankruptcy of the SVB. Banks fell after regulators said they favor stricter rules for banks. But the movement – the SPDR S&P Regional Banking ETF fell 0.09% – was marginal compared to the drastic swings of the past two weeks.

Interest rates probably had a greater effect on market movements. US Treasury yields rose again – the 2-year yield reached 4.08%, breaking the 4% threshold for the first time in almost a week, and the 10-year yield rose to 3.571%. The rise in interest rates suggests that traders are becoming more confident that the banking turmoil is abating and that they are turning their attention back to inflation.

Indeed, the Conference Board’s Expectations Index showed that consumers believe inflation will remain at 6.3% for the next 12 months and that their short-term outlook is at a level consistent with an impending recession. (Although it must be acknowledged that the consumer outlook improved slightly from February, even after the collapse of the SVB.)

As a result, the price-sensitive Nasdaq Composite fell for a second day, losing 0.45%. It may seem like a small drop, but Dan Greenhaus of Solus Alternative Asset Management warned “only the top quintile [of the Nasdaq] Is on; all four other quintiles are down,” indicating that the index is “slightly weaker than the headlines suggest.” Other major indices fared no better. The S&P 500 was down 0.16% and the Dow Jones Industrial Average was down 0.12%.

“For now, investors appear to be looking beyond financial sector challenges and recognizing that US economic growth remains resilient,” said Brian Levitt, global market strategist for Invesco. Bizarrely, even if that’s bad news for inflation, it’s probably good news for anyone who’s been consumed by banking anxiety over the past few days.

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