No systemic risk from SVB failure, but watch out for areas of vulnerability - new investment talks paper
Key take aways:
-?The Silicon Valley Bank (SVB) failure and US regional banks under pressure: The SVB bank failure is the third after Signature Bank and Silvergate Bank, and it is the largest bank failure since the 2008 financial crisis, with SVB being the 16th biggest US bank. The failure was mainly due to an asset-liability mismatch, which resulted in the materialisation of losses from sales of quality bonds that were trading down amid rising yields over the last year.
-?Fed intervention: The Fed stepped in to support liquidity by creating a Bank Term Funding Program to offer loans (of up to one year) to lenders pledging high-quality securities such as USTs, agency debt and mortgage-backed securities. These assets will be valued at par. While systemic confidence will take a bit to be fully restored, the announcement is an important step in this direction.
-?Market reaction: bond markets have been extremely volatile with extraordinary movements in the 2-year yield, with its biggest 1-day drop since 1982. Equity markets also sold off, particularly in the banking sector, including in Europe where we believe the move was mainly due to profit-taking after strong performance since the start of the year.
-?Why we believe this is not a systemic risk: while being a negative for the market, the SVB failure is more of an idiosyncratic story rather than a systemic issue. Compared to the Lehman crisis, the bank is not leveraged, has no big derivatives exposure and no relevant global connections. Yet, this event highlights the need to carefully assess the lagging impacts of higher rates, particularly when it comes to non-systemically important financial institutions and some other non-banking financial institutions, which lack strict regulation.
-?View on the banking sector: since the Great Financial Crisis, the big systemic banks are well capitalised and highly regulated. Overall we favour large banks versus small banks. Particularly in Europe, the sector is in far better shape compared to the previous crisis and we don’t see any risks, such as the one the US regional banking sector is exposed to, amid its better management of duration risk and stringent regulatory requirements. The effect on banks could be more connected to their earnings trajectory, which is our focus at the moment. Overall, this event adds to the case of selection and differentiation among banks.
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-?Possible impact on Central Bank policy: While we believe the Fed will remain committed to fighting inflation, it will have also to assess the impact of the current crisis and its potential spillovers, as the macro scenario remains fragile and the overall assessment is not easy given the lagging effect of policy actions on the economy. The tightening of financial conditions stemming from the SVB crisis may lead to a less aggressive Fed than expected only one week ago and could force the ECB to reassess its policy path. Yet market moves have been extreme and we believe now is not the time to fight the Fed, as inflation remains a key factor to watch.
-?Overall investment stance: overall we confirm a cautious stance as with the inversion of the yield curve suggests some cracks may start to appear. We remain cautious regarding equity and high-yield credit, with a regionally diversified approach, including exposure to Chinese equity, which appears more insulated from the epicentre of the recent turmoil.?
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Founder of Multipolarity.AI, Chairman of The Multipolarity Report, Senior Economic Advisor, Investment Strategist, Senior Policy Advisor. #Geopolitics #Macro #ML #AI
2 年The SVB and Credit Suisse developments show that the perception of risk by a bank’s customers is as important if not more important than regulation. Bank runs may happen even for the highest capitalised institutions. Once it starts, it’s a self fulfilling prophecy / process. Confidence in the system remains the core tenet of any banking / financial system. The European banking system has been protected by its oligopolistic nature and/or intricate web of relationships between the political/regulatory sphere and the banking sphere. Is it optimal? It is just another risk/return trade off which favors stability over growth, at the cost of stagnation at the system’s less advanced margins (eg Italy) and at the cost of the consumer which pays too much and gets less value for money. Hence, the development of alternatives / fintechs like Klarna et al
Credit - Financials, ABS, Corporates
2 年Agree European large banks have adequate capital and liquidity. Banks are interconnected though, so good to see Finma, SNB supportive action overnight.
Business development specialist - RETAIL -
2 年Merci pour la clarté de tes propos !