Why some hedge funds are shorting U.S. banks


The U.S. banking market not too long ago underwent its annual stress check performed by the Federal Reserve. This train, designed to guage the resilience of banks within the face of financial downturns, revealed a blended bag of outcomes that would have far-reaching implications for the cryptocurrency market, significantly Bitcoin.

A stress check is a simulation used to evaluate how banks would fare throughout a monetary disaster. The current check confirmed that banks, on common, skilled a most drawdown on careworn capital of two.3%. The two.3% determine is the bottom seen in a number of years, indicating that banks are extra resilient to monetary stress now than they’ve been previously.

bank stress test historical
Chart exhibiting the historic outcomes from the Federal Reserve’s financial institution stress exams (Supply: Federal Reserve)

Some banks, notably Capital One Monetary and U.S. Bancorp, noticed a bigger drawdown. This implies they might face the next Stress Capital Buffer (SCB), assuming dividends stay unchanged. The SCB is a further quantity of capital {that a} financial institution should maintain to soak up losses and proceed operations throughout monetary stress.

fed stress test bank drawdown
Chart exhibiting the potential drawdown on careworn capital for U.S. banks (Supply: Federal Reserve)

The blended outcomes from the stress check haven’t deterred hedge funds from actively shoring U.S. banks, particularly regional banks. Based on knowledge from Goldman Sachs Prime Brokerage, regional banks are probably the most uncovered to industrial actual property, a sector that has skilled excessive volatility because the COVID-19 pandemic.

regional bank long short ratio
Graph exhibiting the ratio between prime e-book lengthy and quick positions for U.S. banks (Supply: Zero Hedge)

The banking business’s well being is essential to Bitcoin and the broader cryptocurrency market.

Banks present the infrastructure for fiat-to-crypto transactions, and their stability or instability can affect investor sentiment towards cryptocurrencies. Elevated shorting of banks, if it results in a downturn within the banking sector, may doubtlessly drive buyers in direction of Bitcoin as a protected haven asset.

If these shorts result in vital market turbulence, it may create a risk-off atmosphere that negatively impacts Bitcoin.

Nonetheless, the crypto market has typically thrived amidst conventional market instability. Bitcoin, particularly, has traditionally offered a hedge towards conventional market fluctuations. Due to this fact, elevated shorting of banks may doubtlessly increase Bitcoin’s enchantment instead funding.

btc correlation regional banks
Graph exhibiting the correlation between the worth of Bitcoin and the KBW Regional Banking Index (Supply: TradingView)

On the flip aspect, a destabilized banking sector may result in tighter regulatory scrutiny and potential liquidity points for cryptocurrencies. Banks dealing with vital stress might pull again on offering companies to crypto companies, affecting the benefit of fiat-to-crypto transactions.

This might negatively influence Bitcoin within the quick time period, because the market may see weeks of low liquidity and elevated promoting strain.

The put up Why some hedge funds are shorting U.S. banks appeared first on CryptoSlate.


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