Key Takeaways:
- The US banks face liquidity squeeze, but still able to regulate their RWA.
- Liquidity issues and the stock market failure could both stem from the Fed's interest rate hikes.
- The crypto market could suffer more losses through its correlation with the risk-on assets.
YEREVAN (CoinChapter.com) – The United States financial giants, such as JPMorgan Chase & Co, Citigroup, and Bank of America, faced substantial liquidity issues in Q3 2022, threatening to tumble the cryptocurrency market by proxy through its correlation with the stock market.
US banks in liquidity squeeze
According to banks and consumer finance equity analyst Betsy Graseck, after the Q3 earnings reports, major US banks are challenged with a task to “control their effect on fixed-income markets.” The expert also asserted that they expected “different reactions to RWA pressures across the banks.”
In short, RWA, or risk-weighted assets, are a measure of a bank’s ability to take risks. They link the minimum amount of capital that banks must have with the risk profile of the bank’s lending activities (and other assets). The more risk a bank takes, the more capital is needed to protect depositors.
Thus, reduced RWA marks the bank’s ability to stave off insolvency and protect its depositors in the turbulent market.
In aggregate, we looked for lower credit formation, reduced market liquidity, and continued pressure on spreads for capital-intensive assets. The good news is that the three largest banks have made notable progress on the RWA front, reducing their RWAs by about $90 billion.
noted the analyst.
Also read: Hong Kong Wants Bitcoin As Xi Jinping 3.0 Worsens Economic Freefall.
Quantitative tightening to blame?
The University of BATH published a study in late July, foreseeing the liquidity squeeze in the wake of the Fed’s hawkish policies. In short, the Federal Reserve chose to aggressively slam the breaks on the post-Covid money printer and push several 0.75 bps interest rate hikes before the end of 2022.
According to Dr. Ru Xie of the university’s School of Management, anti-inflationary measures lead to liquidity squeezes and stock market failures.
The global financial crisis illustrated how increased funding costs and changes in market liquidity can trigger stock market failures. Our research has demonstrated that excessive financing spreads can harm market liquidity, leading to increased asset price volatility and stock market uncertainty.
read the study.
Notably, the described connection did not come as a surprise. However, the deterioration of market liquidity could have an adverse effect on digital assets as well, considering the correlation between the leading crypto, Bitcoin, and the stock market.
What’s ahead for the crypto market?
The digital assets bled over 70% throughout the year. As a result, the total crypto market cap stood at $907 billion on Oct 25, after the Nov all-time highs at $3 trillion. However, should the stocks sink any further, digital assets might follow.
In detail, the correlation between stocks and Bitcoin remains strong, partially due to institutional inflows. Bank of America’s latest Global Cryptocurrencies note confirmed the narrative, illustrating the connection.
Thus, the only chance for the crypto market to thrive in the near future is to decouple from risk-on assets. However, it is not yet clear if whale accumulation and stablecoin inflow will be enough to recover the digital asset market.
Moreover, the said correlation plays out for the first time in Bitcoin history. Hence, prior-used parameters might fail in assessing the present market conditions. Click here for more news on all things crypto, and keep up with the ever-changing market!
