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What You Need to Know

  • BlackRock doesn't see a 2008 global financial crisis repeat.
  • Post-2008 regulations left banking sector stronger, Fidelity says.
  • This is a liquidity event, not a solvency crisis, says Fidelity.

Recent bank failures may be shaking up markets but analysts don’t consider it the same as the global financial crisis of 2008, citing different catalysts and macroeconomic conditions. 

Among other differences, the current stresses resulted from the Federal Reserve’s aggressive interest rate hikes over the past year, analysts said.

While U.S. agencies recently made whole depositors at Silicon Valley Bank — the largest bank to fail since 2008 — and Signature Bank, market strategists see differences from the earlier, widespread industry crisis.

Rate Hike Fallout

BlackRock Investment Institute, similar to other market experts, called recent bank failures “the latest fallout from the most rapid rate hikes since the early 1980s. We have argued that bringing inflation down would be costly, creating economic damage and cracks in the financial system.”

The firm, in commentary Monday, said it expected events this week to crimp bank lending, which reinforces its recession outlook as central banks keep fighting inflation.

“The banking stresses that are roiling markets are very different — but what they have in common is that markets are now scrutinizing bank vulnerabilities through a lens of high interest rates,”  BlackRock wrote. “We don’t see a repeat of the 2008 global financial crisis. Some of the troubles that emerged recently were longstanding and well-known, and banking regulations are much stricter now.

“Instead, this is about a recession foretold. Why? The only way central banks could bring inflation down was to hike rates high enough to cause economic damage. The latest financial cracks are likely to tighten credit, dent confidence — and eventually hurt growth.”

BlackRock is staying underweight equities and has downgraded credit to neutral, has overweighted short-term government bonds and favors emerging market assets, including emerging market stocks and local-currency debt.

Lessons Learned

Bob Doll, chief investment officer at Crossmark Global Investments Inc., said in a note Monday that today’s bank losses aren’t related to economic problems or deteriorating credit and are “quite different” than the 2008 financial crisis.

A deflationary outcome could have happened if policymakers hadn’t intervened and provided a backstop for bank depositors last week, Doll wrote. “Central banks learned the lesson of 2008 by acting quickly and providing open-ended protection to depositors, but not shareholders,” he said, adding that the Fed should issue verbal guidance and regulatory measures to address lingering concerns in the banking sector.

Because investors fear further contagion, financial markets will continue to be volatile and prone to “risk-off” investing until shoes stop dropping, Doll wrote. The free-money era’s rapid end, with the Fed raising its interest rates to 4.5% in 12 months, was bound to cause transitional problems for various asset markets, he said.

If confidence in banking returns, Doll expects the Fed to to hike its benchmark rate to 5% to 5.25% and hold it there through year-end.

No Big Freeze

While the current liquidity crunch brings negative economic and market consequences, “it will not result in a wholesale freeze across the financial system” in the U.S., Dave Sekera, senior U.S. market strategist for Morningstar Research Services LLC, said in an article last week.

“The 2008 banking crisis was driven by the fact that no bank understood the extent of losses on each other’s balance sheets. The managers that oversee credit-counterparty risk on trading desks halted trading with other banks as they feared … the risk that the other bank could default over the near term. Commercial paper markets froze, interbank lending stopped and trading ground to a halt,” he explained.

“What is different now is that banks do not have the same size holes in their balance sheets as they did then,” Sekera wrote Friday.

In the run up to the earlier crisis, banks took on low-quality mortgages and collateralized debt obligations and “CDO-squared” vehicles, and when the housing bubble popped, these assets were worth anywhere from zero to pennies on the dollar, he added. “Today, the losses on long-dated bonds in hold-to-maturity accounts is much less,” he said.

Morningstar considers fallout from the U.S. bank failures to be manageable, he wrote. On Monday, Sekera told ThinkAdvisor the research firm expects “that the current situation should remain much more limited.”

Over the weekend, UBS agreed to buy stressed Credit Suisse in a deal brokered by Swiss regulators. 

“In our view, the issues that drove Credit Suisse into the arms of UBS was idiosyncratic to Credit Suisse and not indicative of broader problems across the European banking system,” Sekera told ThinkAdvisor. “There may be some short term dislocations as the markets digest this news, but expect that those dislocations will be resolved rather quickly.”

Stronger Banking Sector

Jurrien Timmer, Fidelity Management & Research Co.’s global macro director, wrote last week that the Silicon Valley Bank’s collapse “has been primarily a liquidity event — i.e., there were insufficient liquid assets on hand to meet immediate cash demands — rather than a solvency crisis, such as one in which a bank simply has insufficient equity relative to its debt. The financial crisis in 2008 was both, and the regulation that followed has left the banking sector in a much stronger position.”

The mismatch between bank assets and liabilities, however, could affect the banking sector’s profit margins, he noted.

SVB’s collapse “does bring to light the fact that banks have been paying depositors much less than competing short-term vehicles do,” generally offering about 0.5% on deposits compared with a 4.5% average money-market yield, he said.

“Banks may now have to start competing for those deposits, by paying higher rates,” Timmer wrote. “But paying higher rates on deposits could eat into net interest margins … impacting the overall profitability of the financial sector.”

(Image: Adobe Stock)