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Options trading soars as investors prepare for volatility at US regional banks

Investors seek protection against new financial turmoil for U.S. regional bank stocks Silicon Valley Bank.

Bloomberg data show that regional bank stocks have held steady after the SVB collapse caused a sharp drop in mid-March, but traders are pushing for options related to the most volatile midsize banks to record levels. purchased for a reasonable amount. Several banks hit hard by recent volatility, including Citizens Financial, Charles Schwab and Keybank, saw option rates reach record levels, and many more hit multi-year highs. Did.

Contract pricing suggests investors expect volatility in some stocks Bank According to RBC Capital Markets analysis, it could be up to three times higher than normal levels.

The interest in lenders such as Citizens Financial, Keybank and licensed investment group Charles Schwab reflects the challenges facing mid-sized lenders.They have long played a very large role in the U.S. economy, but they have suffered from declining earnings prospects, deposit outflows, and tightening regulations It can test your ability to thrive.

Morgan Stanley analysts recently cut earnings forecasts for regional banks by 20% this year and nearly 30% in 2024.

“Profitability in the sector has deteriorated significantly over the past month,” said Chris McGratti, who follows regional banks at KBW, and expects the recent crisis to lead to more mergers. “Bank boards will have to debate whether it still makes sense to be an independent company,” he said.

Options investors are pricing in up to 10% or more of a share price move in Utah’s Zions Bancorp and Texas-based Comerica, two of the first regional banks to report results later this month.

“There’s a lot of volatility to expect and it’s starting to seep into the market early,” said Amy Wu Silberman, equity derivatives strategist at RBC Capital Markets. “A significant number of customers consider the financial year to be an inflection point,” which can lead to large gains or losses depending on the bank’s financial results.

The United States is home to about 4,400 banks, but the concerns sparked by the SVB collapse have left some 100 lenders just below the country’s top 20 banks, including JPMorgan Chase and Bank of America. Concentrated.

These medium-sized lenders have between $10 billion and $150 billion in assets, including what a 2015 Harvard study called a “disproportionately large” share of commercial lending, especially to small businesses. It aggregates about one-third of all US lending.

Many banks have started losing money on their bond investments this year due to rising interest rates. The demise of SVB, Signature, and Silvergate sparked greater disputes between clients and investors, and sped up Deposit outflow Also, the KBW Regional Banks Index is down 20% in 10 days.

Contingency measures by the US Federal Reserve and Federal Deposit Insurance Corporation and the decision by the largest US lender to deposit $30 billion in one of the US banks. Banks hit hardest, the First Republic stave off an immediate slide. However, analysts fear the sector will decline for years to come.

of local bank “We are in a very difficult position,” said Blake Gwin, head of rates strategy at RBC.

Unlike large banks, which regularly use the wholesale market, regional and regional banks typically fund their loans by accepting deposits. At this time last year, smaller U.S.-based commercial banks collectively held $5.3 trillion in core deposits, supporting $4.6 trillion in loans and hard-to-sell investments, according to the Federal Reserve. I was. The gap meant banks had a $700 billion buffer in cash or assets if depositors wanted their money back.

That buffer is gone, according to central bank data released last week. Local and community lenders had $260 billion more in loans and hard-to-sell investments than he deposited. Smaller banks have collectively drained his $420 billion core deposits since mid-last year, including his $250 billion last month, as customers used or moved cash accumulated during the pandemic.

Local lenders are looking to government-backed institutions, borrowing about $300 billion from the Federal Reserve and the Federal Mortgage Bank.

Lenders have to pull customers back from money market funds to stay healthy. Money market funds are currently paying more than 4% a year, compared to about 0.5% on most bank savings accounts, said Jim Bianco, macro strategist at Bianco Research. . However, this would significantly reduce profitability.

“The general idea is that you’re more likely to get divorced than to quit banking,” Bianco said. “The reasonable thing people should do these days is not to put their money in the bank.”

Analysts expect regional bank profits to be further squeezed by plans to reimpose stricter rules and regulations after the SVB’s demise. President Joe Biden has called for the reversal of his 2018 changes that cut his bank oversight from $50 billion in assets to $250 billion in his oversight.

“Some of the regulations determine the balance between safety and soundness on the one hand, the cost of those regulations and the cost of their supervision, and the ultimate goal of having a financial system that actually works and helps the economy. Richard Varner, who previously ran the U.S. Financial Research Service, the agency that reports to the Treasury Department, said:

Jonathan Parker, a professor of finance at the Massachusetts Institute of Technology, said regulators should force banks to raise more capital so they can continue to “lend freely.” It raises capital unfavorably.”

Tighter capital and liquidity rules would raise the cost of doing business for local banks, but Donald Cohn, former vice chairman of the Federal Reserve, said the change would hurt investors and customers in the long run. said it could be more attractive to “Over time, people may feel safer and more likely to survive,” he said.

https://www.ft.com/content/ee898740-52d7-4617-94dc-8addbecb86d8 Options trading soars as investors prepare for volatility at US regional banks

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