Navigating the Storm: How Banking Turbulence Impacts Securities Lending

Introduction

In recent weeks, the banking sector has been hit by a wave of uncertainty, leading to increased price volatility and heightened lending demand in regional banking securities. The collapse of Silicon Valley Bank and the subsequent seizure of First Republic Bank by regulators, with its sale to JPMorgan Chase, have sent shockwaves through the financial world. This article delves into the repercussions of these events on securities lending, with insights drawn from Orbisa data.

The Domino Effect: Silicon Valley Bank and First Republic Bank

The turmoil began with the sudden collapse of Silicon Valley Bank, sending shockwaves throughout the industry. This was swiftly followed by regulators stepping in to take control of First Republic Bank (FRC) and orchestrating its sale to JPMorgan Chase (JPM). This transaction, announced on May 1, 2023, was the second-largest U.S. bank failure since the 2008 financial crisis. As a result, JPMorgan acquired the majority of First Republic’s assets.

Securities Lending Volatility

From a securities lending perspective, the impact was significant. Shares in First Republic experienced a sharp increase in volatility in the cost to borrow in the week leading up to its sale. Orbisa’s 1-week fee volatility metric, which measures the average day-over-day fee change for the preceding week, serves as a testament to this turmoil. On Monday, April 24, the metric stood at just 99 basis points (bps). However, by Thursday, April 27, it had skyrocketed to a staggering 4,907 bps.

This dramatic surge in fee volatility highlighted the unease in the market as investors grappled with the uncertainties surrounding First Republic Bank’s future. Such fluctuations can have a cascading effect on securities lending, impacting both lenders and borrowers in the market.

Ripple Effects on Regional Banks

The First Republic takeover exacerbated investor uncertainty, putting several regional banks under the spotlight. One of the most prominent examples is PacWest Bancorp (PACW), which had already been struggling in 2023. On one particularly tumultuous Thursday, PACW’s stock price plummeted, losing 50% of its value in a single day. This dramatic decline in a regional bank’s stock highlights the vulnerability of such institutions during times of financial distress.

Other regional banks, including First Horizon (FHN), Metropolitan (MCB), and Western Alliance (WAL), also experienced significant selloffs in the first week of May. The turmoil in the banking sector had a domino effect, shaking investor confidence and raising concerns about the stability of regional banks.

Increased Lending Activity

Orbisa data reveals that lending activity surged across the aforementioned regional banking securities. Western Alliance (WAL), in particular, saw a substantial increase in on-loan shares. An additional 12 million shares were lent in the past week, making it one of the most active securities in the lending market.

The heightened lending activity indicates that market participants are actively responding to the shifting dynamics in the banking landscape. Lenders are seeking to capitalize on the increased demand for these securities, potentially earning higher fees as borrowers scramble to secure shares.

Conclusion

The recent turbulence in the banking sector, characterized by the collapse of Silicon Valley Bank and the seizure of First Republic Bank, has reverberated through the securities lending market. Increased price volatility and lending activity in regional banking securities have created both challenges and opportunities for market participants.

As Orbisa continues to monitor these developments, it is crucial for investors and financial institutions to stay vigilant and adapt to the evolving landscape. The impact of banking turbulence on securities lending underscores the interconnectedness of financial markets and the need for a comprehensive understanding of the risks and opportunities that arise during times of crisis.