Markets are behaving as if there’s a banking crisis. Since the collapse of Silicon Valley Bank (SVB) last Friday another small American bank has folded and now Credit Suisse, Switzerland’s second-largest bank, is in trouble. So, what is going on?
SVB operated in the tech sector and appears to have had some bad loans on its books, but it was well capitalised. However, it became a victim of the recent hikes in interest rates. It held a lot of Treasury Bonds on its books and suffered as the value of these securities reduced due to recent increases in interest rates. This was mismanagement by the bank.
It is also notable that both banks were involved in lending to crypto companies.
Credit Suisse has had a patchy reputation for years but seems to be in reasonable financial shape. That said, people are taking a closer look at their banks, and so any concerns could lead to a rush to withdraw deposits. In any event, regulators and governments are well aware of the damage a banking failure can have to their economies and will act swiftly to protect depositors.
The bigger issue is that banking shares have suffered badly, as it’s apparent that the sector may be facing a profit crunch, and that more generally, financial conditions have tightened. Banks are likely to become warier lenders to business and industry. This effect is so powerful that it may put a halt to planned increases in interest rates in the US and Europe. One commentator stated that the SVB collapse had the effect of an increase in interest rates of 1% across the globe.
The short-term impact is that there may be more market stress, but we don’t think there is likely to be a string of banking failures (as there was in 2008), although confidence has taken a knock. I expect interest rates will be lower than they might otherwise have been.
Fortunately, many hard lessons were learned in the credit crunch of 2008 and banks are required to be far better capitalised and more cautious nowadays as a result of increased regulation.
If you have any questions, please contact your financial planner at HA&W.
Best wishes,
Jim
Jim Aitkenhead BA(Hons)Econ FCII APFS ACSI
Chartered Financial Planner
