Fear Sends Risk Assets Down, As Banking Sector Vows Return

Today it appears that the KRE regional bank index has experienced a significant decline, losing nearly 4% and falling below the early March low. The cause of this downturn is unclear, but it may be something we don’t know or due to short-term buyers taking profits or selling off their positions in hopes of a rebound. Additionally, there may be a lack of potential buyers due to concerns about commercial real estate and hold-to-maturity loans, leading to compressed multiples on regional banks.

The fear is that this decline could result in deposit flight and put the FDIC in a difficult position. Many had thought that the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) would mark the end of the regional banking crisis, but after today’s price action, that may no longer be the case.

The market is sending a message to the Fed that it is not happy with the surprise hike from the Reserve Bank of Australia (RBA), and if the Fed does not provide more explicit guidance at tomorrow’s FOMC meeting, there could be further negative consequences.