The financial system and the global economy are not going to get off scot-free after the sudden rises in interest rates by central banks. It is the great slap of reality that leaves this week. The effects of the vertiginous increase in the price of money have unexpectedly materialized in the collapse of the American Silicon Valley Bank and with the increasingly serious crisis of Credit Suisse. Mistrust of banks has surfaced, causing a profound shock in financial markets that promises to have an impact on growth, interest rates, credit and investment.
The magnitude and scope of the banking crisis declared these days is still unknown. The experts insist on discarding the comparison with the depression caused by the bankruptcy of Lehman Brothers in 2008: banks are much better capitalized and regulated than then, and there is no fear of a systemic banking crisis, which will drag down banks as a whole and with it to the rest of the economy. But the fuse of mistrust has lit and the efforts of the authorities and central banks to restore it have so far a limited effect. Its reaction this time has been swift, very different from its wavering in the face of previous financial turmoil. Even so, the week ends with many questions and not so many certainties about the situation of the bank. “The reality is that markets have already seen signs of bank stress, and anyone who has felt the effects of the global financial crisis will not be easily convinced that all is well by what financial officials, often responsible for extremes, say. of liquidity that cause many of these problems. Now that the bank stress toothpaste is out of the tube, it’s not going to be so easy to put it back in”, says James Athey, investment director of the abrdn manager.
The week began with the monumental hangover from the intervention, last Sunday, of Silicon Valley Bank and Signature Bank. The US Treasury and the Fed also launched an extraordinary line of liquidity for entities in trouble. It was the formula with which to try to stop the rapid withdrawal of deposits that had been launched among the regional entities of the US and that had taken SVB ahead. The solution proved insufficient a few days later, when a group of 11 large banks injected $30 billion in deposits into First Republic Bank, the third bank in trouble in less than a week.
Meanwhile, in Europe the alerts have gone off with Credit Suisse, a bank that has been experiencing difficulties for months and which, given the collapse on the Stock Market and the flight of deposits, has resorted to a liquidity loan of up to 50,000 million euros from the Bank National of Switzerland. The Swiss giant suffers the loss of its high-net-worth clients and is not counting on its main shareholder, the Saudi bank SNB, to contribute more capital.
Investors and clients inevitably wonder these days if the banks in which they invest and deposit their savings are sound. The ECB insists on saying yes. After an extraordinary meeting held this Friday to detect possible sources of weakness in the financial system, the European banking supervisor does not appreciate the risk of contagion due to what happened with SVB and Credit Suisse. Economists and authorities insist that European banks are well equipped to resist the contagion of mistrust unleashed from the US, where they also do not anticipate a widespread banking collapse that would inevitably have an overwhelming impact worldwide.
“We see very little impact from the Silicon Valley Bank bankruptcy on European banks, which have lower deposit concentration, continue to record healthy deposit flows, operate with large liquidity portfolios, and continue to be well capitalized,” they say from Citi. For Sam Theodore, an expert at the Scope rating agency, “We are not witnessing the start of another banking crisis. SVB is not symptomatic of the situation of American or European banking. Market confidence in most of the big European banks will recover in due course and sooner rather than later, because there is no reason why it shouldn’t. Most of the large European banks, except for a minimum number of atypical cases, maintain reassuring prudential parameters, both for capital and liquidity. It is these minimal atypical cases, those of the most vulnerable banks that Luis de Guindos, vice president of the ECB referred to this week in his meeting with Ecofin, are the ones that prevent investors and savers from restoring calm and aim to modify the future horizon. immediately for the economy and the financial market.
The impact on credit
For now, the banking turmoil promises to make credit even more expensive. The interest rates paid by companies and individuals are already on the rise with interest rate hikes, a process that is going to accelerate. Distrust in banks is synonymous with an increase in the cost of financing: when banks have liquidity difficulties, they prefer to protect it rather than lend it.
According to Philipp E. Bärtschi, chief investment officer at J. Safra Sarasin Sustainable AM, bank failures in the United States are unlikely to trigger a global financial crisis, given that the balance sheets of most global banks are much stronger than they were last year. 15 years. “However, the increase in financing costs and the tightening of financial conditions will probably cause a decrease in credit growth and will have a negative impact on the growth of the economy in the coming quarters.”
Anna Stupnytska, global macroeconomist at Fidelity International, also warns of more expensive credit, as already revealed by the latest ECB survey on bank lending for the first quarter of this year. “We now expect that the banking sector vulnerabilities that have surfaced will have a direct impact on the willingness of banks to extend credit, leading to even more restrictive financing conditions which, in turn, would affect the economy. potentially sooner and more harshly than expected”, warns the economist.
Initially, the declaration of the state of alarm in banks has cooled expectations of interest rate rises for the coming months. More expensive money would only add fuel to the fire. The ECB did raise rates by half a point this Thursday, as it had already announced in February that it would do, and more as a gesture with which it would not go back on its own words and its commitment to combat inflation. A lower rise would have been the way to recognize the seriousness of the banking problem, not to mention the panic that the decision not to raise interest rates at all could have unleashed, according to financial sources. But the ECB refused to give any indication of upcoming increases, which will be strictly subject to economic indicators and the intensity of the financial turmoil.
The fall of the SVB and the difficulties of the regional banks in the United States will also influence the next steps of the Fed. Firms such as Goldman Sachs are not ruling out even giving up raising rates at their meeting this week. Buried remains the expectation prior to the collapse of Silicon Valley Bank of a rate hike of up to half a point this coming Wednesday.
But the fact that interest rate hikes are not expected as resounding as before does not mean any relief for the economy. Even to the contrary, a banking crisis is the fastest and most explosive way to cool the escalation of prices pursued by the Fed and the ECB. At the cost, yes, of growth.
Rates not so high and risk of recession
“These developments may very well lead to a recession. In fact, a deleveraging event like the one in 2008 is not essential for the economy to fall into recession,” argues Tiffany Wilding, economist at PIMCO. Again, the credit crunch would be the trigger. “There are very good reasons to believe that credit growth, which was already slowing, will slow further as a direct consequence of these latest events, despite the actions taken by officials and the Federal Reserve.”
In Nomura they also warn of the possibility of other banks joining the trickle of bank collapses and insist that the consequent tightening of loans could send the economy into a recession from the second half of 2023. The risk already existed with the sudden rise in interest rates started last year but is now accelerating with the fall of SVB.
The credits promise to be more expensive. And what will happen to the deposits? Is the bank going to pay more for them if it fears that its clients may go to an entity that they perceive as safer?
The big banks in the United States are being the big beneficiaries these days of the liquidity difficulties of the country’s regional entities. Savers are looking for large banks that are too big to fail and have more stringent liquidity requirements. They will be better equipped to withstand a withdrawal movement from their customers.
In the euro zone, liquidity requirements are also applicable to smaller entities. Tighter regulation now makes European banks safer overall, a safeguard the Federal Reserve is taking note of. But, as Moody’s warned this week, “these critical differences with the US do not make European issuers invulnerable. When trust is shaken, the contagion can be fast.”
Spanish banking sources acknowledge that improvements could be seen in the remuneration of savings among small and online entities. Clients might be tempted to move their money to larger, systemic banks. But any bank that pays more will have to do so very stealthily: the search for customer deposits can be taken as a sign of weakness, of liquidity troubles.
The Spanish bank is not in any case these days in the first line of fire of the sales of the investors. Its liquidity levels are above the European average, according to Citi. Specifically, the liquidity coverage ratio of Spanish banks, which measures a bank’s ability to convert its assets into cash and without a significant loss of value, stands at 193%, compared to the European average of 163% and above 148% of German banks.
Investors on guard
Despite the differences and nuances by country, the stock market punishment of banks is being widespread. The collapse of SVB has shattered the bullish spell that banks enjoyed on the stock market thanks to rate hikes. It was being the long-awaited moment to increase margins and profits after years of zero rates.
Managers do not completely relinquish their positions in financial stocks. In firms such as UBS, Barclays or Singular Bank, they maintain their overweighting for European banks, which many investors now see as more attractive than in the United States. But the watchword is above all caution, the banks’ stock market decline has not yet bottomed out, an adjustment that extends to the market as a whole. “It is not a positive context for the Stock Market. Corporate earnings will come under pressure and valuations are likely to fall given the higher level of risk aversion,” says Philipp E. Bärtschi.
The week has shown the darker side of rate hikes. As happened with the collapse of FTX or with the British pension funds a few months ago, those investments that were only profitable thanks to close to zero interest rates have come to light. A more expensive money in a short time has already claimed its first victims in the bank.
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