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Why some hedge funds are shorting U.S. banks


The U.S. banking market lately underwent its annual stress take a look at carried out 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 might have far-reaching implications for the cryptocurrency market, notably Bitcoin.

A stress take a look at is a simulation used to evaluate how banks would fare throughout a monetary disaster. The current take a look at confirmed that banks, on common, skilled a most drawdown on pressured 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 prior to now.

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

Some banks, notably Capital One Monetary and U.S. Bancorp, noticed a bigger drawdown. This implies they may face a better 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 displaying the potential drawdown on pressured capital for U.S. banks (Supply: Federal Reserve)

The blended outcomes from the stress take a look at haven’t deterred hedge funds from actively shoring U.S. banks, particularly regional banks. In accordance with knowledge from Goldman Sachs Prime Brokerage, regional banks are essentially the most uncovered to business actual property, a sector that has skilled excessive volatility for the reason that COVID-19 pandemic.

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

The banking trade’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 probably drive traders in direction of Bitcoin as a secure haven asset.

If these shorts result in important 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, specifically, has traditionally offered a hedge towards conventional market fluctuations. Subsequently, elevated shorting of banks may probably enhance Bitcoin’s attraction as a substitute funding.

btc correlation regional banks
Graph displaying the correlation between the value 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 important stress might pull again on offering providers 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 publish Why some hedge funds are shorting U.S. banks appeared first on CryptoSlate.

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