The effects of March’s mini banking ‘crisis’ seem largely done and dusted for markets. While it’s not productive to dwell on the past, there’s always something to learn from challenging situations. The main takeaway for me was how quickly the feeling of nervousness returned. The events of 2008 are not so long past that they’re forgotten.
Taking a more rational view, instead of signalling impending sector collapse, the fallen banks are illustrative of the fact that when interest rates are hiked so far and so fast there are going to be fallout effects. The piper had to be paid and banks were the currency.
Silicon Valley Bank, Signature Bank and Credit Suisse were not necessarily victims of mismanagement, but they certainly had problems with risk around their deposit bases. Their downfall is illustrative of the fact that banks more generally, have lent at lower rates (particularly on mortgages), and now their cost of funding has gone up, creating a mismatch. This is playing out first on weaker institutions or those that perhaps have larger loan books, particularly in property.
In turn, this is fuelling speculation regarding the possibility of the commercial real estate market being the next shoe to drop as some companies walk away from their obligations. But unlike in 2008, I don't think recent events in the banking sector are systemically important.
What they do highlight is that in the US (I think it's idiosyncratic to the US alone), you are going to see regional banks, which make up a larger proportion of lending for localised businesses, facing tighter credit conditions. I would expect to see a shift towards greater caution as a natural response to the current interest rate environment.
On sentiment, there’s some lingering nervousness, but volatility is lower than we’d expect at this point in the cycle. I think that's reflective of today's situation being unusual in that we still haven't seen any major pressures on the underlying economic environment that would suggest there is a big recession coming. Instead of recession, the market needs to get its head around the fact that inflation is going to be higher than the arbitrary 2% figure we’ve all got used to. And that's not necessarily a bad thing — you need a bit of inflation for an economy to grow.
Outlook
From the monetary policy side, I think we’re almost done. We expect the US to follow through with its last one (or max two hikes), but the peak is in sight.
Historic patterns suggest that after a period of aggressive hikes (staircasing upward), you typically have a period of stability when central banks wait to see what happens, then rates drop very quickly (taking the elevator down). The market is expecting this pivot to kick in before the year is out, which seems unlikely to me.
