Markets are grappling with a US$600 billion ($804.96 billion) question right now. Are the half-dozen banks in the spotlight outliers or a warning sign of a wider malaise in the financial sector?
Bank investors have largely been selling first and leaving that question for later. Around US$600 billion dollars of market value has evaporated from the 70 biggest US and European banks since March 6, a period that’s seen the collapse of Silicon Valley Bank, Credit Suisse Group AG receive a US$54 billion lifeline from the Swiss National Bank and a US$30 billion Wall Street whip-round for First Republic Bank.
A months-long bank rally is now a rout. Bank executives and analysts say that is an overreaction given the system is much better equipped to handle stress and central banks have stepped in with more than US$200 billion of assistance.
“Credit Suisse has had idiosyncratic issues and I don’t think people can sensibly read across from that one particular bank to the rest of the banking sector,” NatWest Group Plc Chairman Howard Davies told Bloomberg Television on Friday. “Overall the European banking sector remains strongly capitalized and remains very liquid.”
His views were shared by Mark Dowding, chief investment officer at RBC BlueBay Asset Management, who said that while the crises at SVB and Credit Suisse may rekindle memories of the 2008 banking crash things are different this time around.
“Back at the time of the GFC, banks were much less regulated, ran excessive leverage and were poorly capitalized,” he said. “Moreover, it was credit impairment in US mortgages which acted as a catalyst that then triggered a collapse. In 2023, the banking landscape is totally different.”
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Indeed, the biggest US banks — even as their share prices got hit — have been beneficiaries as customers sought a flight to safety with their deposits. And the giant firms felt confident enough to each put US$5 billion of cash into First Republic.
Investor Confidence
But others take the view that investor confidence is so shaky that contagion is a real risk and more intervention is needed — and fast.
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“I am simply extremely concerned about financial contagion risk spiralling out of control and causing severe economic damage and hardship,” billionaire investor Bill Ackman tweeted on Friday. “I have said before that hours matter. We have allowed days to go by. Half measures don’t work when there is a crisis of confidence.”
Bond market veteran Anthony Peters caught the mood in his daily newsletter on Friday morning when he said that the market reaction to the last week’s events showed that some financial professionals simply did not trust in the web of post-GFC regulation to save the system.
For analysts at Jefferies, the concerns facing European banks are in “the rear-view mirror” as they pointed to the high levels of solvency and liquidity in the system. Still, they also noted “this portrait of strength can - as has been seen over the past week on both sides of the pond - also be undermined by confidence issues,” they added.
While there is little consensus around the possibility of contagion, there’s broad agreement that finance’s landscape has changed.
Recent events have many betting that central banks will pause or even reverse their upward climb. On a call with clients this week, Jason Napier, an analyst at UBS Group AG, said their assumption was that further rate rises were off the table for the time being. That will likely hit bank shares, which typically benefit in a higher interest rate environment.
And the banks at the centre of the storm have already been changed utterly. Silicon Valley Bank’s former parent company has filed for bankruptcy while JPMorgan Chase & Co. analyst Kian Abouhossein said this week that a takeover of Credit Suisse by UBS is now a plausible outcome.
“Status quo is not an option,” he wrote.
