U.S. banks should defend by boosting liquidity, curbing risk -Morgan Stanley

NEW YORK (Reuters) – U.S. banks should boost liquidity, tighten lending standards and boost balance sheet defenses after bank closures heightened concerns about systemic risks, Morgan Stanley (NYSE:) analysts said on Monday.

“Expect management teams will open up the defense playbook,” said a Morgan Stanley report led by Betsy Graseck.

The bank said the sector is already in “systemic risk territory,” as the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) jointly invoked the systemic risk exception last week.

A market-based indicator of stress in the U.S. banking system jumped on Monday to its highest in three months, as turmoil engulfed regional lenders following the collapse of Silicon Valley Bank (SVB) and Signature Bank (NASDAQ:).

The gap between the U.S. three-month forward rate agreement and the three-month overnight index swap rate, a funding stress indicator, rose to around 18 basis points in London trade from 23.7 bps on Thursday.

The absence of SVB and Signature will alter the mid-cap bank landscape, Jefferies analysts led by Ken Usdin said in a report to clients on Monday.

Neither bank operated a traditional regional banking model that was based largely on a branch footprint, but both were well-regarded product providers in their chosen businesses.

Morgan Stanley analysts said U.S. banks should boost loan loss reserves by increasing “qualitative risk assessment” as a hard landing seems more likely now than it was end of last year.

They should also redeploy securities rolloff into overnight reserves at the Federal Reserve and raise deposit rates to attract incremental deposits.

Morgan Stanley also said U.S. banks should tighten lending standards, which will make it tougher to get a loan.

“We don’t think large banks will come in and entirely fill the vacuum that the regional banks leave, as most banks will want to tighten standards,” it said.