"No Signs of Systemic Risk From U.S. Regional Bank Troubles... Limited Impact on Fed"

On October 20, Korea Investment & Securities assessed that, despite renewed concerns over the financial health of U.S. regional banks, "there are no signs of these issues spreading into a broader financial system risk, and the impact on Federal Reserve policy decisions is also limited." The firm also determined that the potential for further declines in U.S. Treasury yields is limited.

An Jaegyun and Moon Dawoon, researchers at Korea Investment & Securities, stated in their report released the same day, titled "U.S. Regional Bank Insolvency Risk Check - Bond Note," that "the scale and scope of losses at the two troubled U.S. regional banks (Zions and First Alliance) are smaller compared to the Silicon Valley Bank (SVB) crisis in 2023."

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The report noted, "The expected losses announced by the two banks are around 0.1% of their assets, a level that can be sufficiently managed within their loan loss provisions." It continued, "Despite the relatively small absolute and relative size of these losses, the market's concern over a repeat of the SVB crisis stems from accumulated fatigue regarding tight financial conditions."

Furthermore, the report explained, "After the SVB crisis, there was a significant rise in credit spreads for banks, securities firms, and asset management sectors within the financial sector, and this trend continued until the end of March." It added, "Currently, credit spreads in the financial sector are moving in tandem with overall interest rates, indicating that there is no particular buildup of stress." The report emphasized that excessive concerns about a financial crisis should be avoided.

However, the report maintained an "optimistic outlook on the current regional bank situation," while also noting, "There is still a sufficient possibility that some investors may withdraw deposits, primarily from small and mid-sized banks."

The report also pointed out that the yield on the 10-year U.S. Treasury note has returned to the 3% range since early April, and the spread between the 10-year and 30-year notes has narrowed to below 60 basis points (1bp = 0.01 percentage points), indicating a downward trend in long-term interest rates. The report added, "While this is partly due to expectations regarding the Fed's monetary policy, the temporary increase in demand for safe-haven assets following the regional bank situation has also contributed."

The report concluded, "It is difficult for the Fed's monetary policy to become more accommodative, and the likelihood of systemic financial instability is low, so the potential for further declines in U.S. Treasury yields is limited." It further assessed, "If the 10-year yield approaches or falls below 3.9%, the price attractiveness diminishes."

This content was produced with the assistance of AI translation services.