Are banks heading for a precipice?

Banks have been having a whale of a time as issuers in the bond market this month, with ample demand. But a whole gang of threats is creeping towards them. Having failed to pass on higher interest rates to their depositors, banks are vulnerable to a deposit war, in which banks compete with each other to raise rates and attract deposits – but worse, governments are wolfing the same money by issuing very popular retail bonds that pay far more than deposits.

Meanwhile, central banks are not satisfied with the monetary tightening measures so far and want to actively drain liquidity out of the banking system. The European Central Bank is talking about massively jacking up its Minimum Reserve Requirement, which would force banks to park money idly and squeeze their profits. It might also start selling its QE holdings of bonds into the market, which again would suck deposits out of the banks.

All of this points to banks having to borrow much more in the bond market, which could be painful for the weaker brethren. Worst of all, it could tip the banking sector into a crisis, or the economy into a recession.

Plus we look at the dwindling greenium in the public sector bond market and the new craze among direct lending funds: investment grade companies.