Contact

Menu

Article

Raise rates fast and break things

Banking stress adds to market volatility for investors and policymakers.

April 3, 2023

Paul Hsiao

Director – Product Advocacy

Takeaway:

Banking sector stress complicates growth story 

Historically, bank failures are more norm than exception

Number of Banks Failures in the United States

Source: FDIC, Credit Suisse Asset Management as of 1 March 2023

Bank failures are not a new story. According to the FDIC, there have only been three years in the past thirty when there hasn’t been a failed banking institution in the United States. Yet the speed and magnitude of the Silicon Valley Bank failure have already compounded reignited fears of a 2008-like contagion and elevated fears of a global recession this year.

The recent banking sector stress – starting in the U.S. before moving to Europe – adds another hurdle to a global economy that already was under pressure caused by high inflation and interest-rates hikes by central banks. The collapse of Silicon Valley Bank in the United States sparked a selloff of bank stocks – which are now trading at their lowest levels seen since the COVID-19 selloff – and a tightening of credit conditions, which may have greater implications for the real economy.

Both equity and bond market volatility surged during COVID...

Bond and equity market volality

Source: Bloomberg, Credit Suisse Asset Management as of 24 March 2023

This is not a 2008 moment – banks are stressed but not broken 

Despite the doom and gloom investors may read in the headlines, we do not believe that this is a 2008 moment.

  • Sources of stress are different. In short, 2008 was a solvency issue, whereas today’s banks face a liquidity issue. The collapse of Silicon Valley Bank, the catalyst of the global banking rout, was due not to a rapid deterioration in credit quality, but rather to a good old-fashioned run on the bank. In this scenario, depositors withdraw their cash en masse.
  • The global banking sector remains sound…for now. Compared to the situation leading up to the Great Recession, the global banking system appears much stronger today. On the asset side, banks are much better-capitalized thanks in part to increased regulation and scrutiny after the Great Recession. On the liability side, the share of non-current loans and leases as a percentage of total loans remains at the lowest recorded levels, which means that banks have a larger buffer to write down losses before they eat into the banks’ capital.
  • Whereas the policy action during the Great Financial Crisis was too little too late, today’s policymakers acted quickly to prevent the banking stress from becoming systemic. Policymakers worked swiftly and in a coordinated fashion, restoring some confidence in markets. On the weekend that Silicon Valley Bank failed, the FDIC took the extraordinary step of guaranteeing all deposits – even those beyond the standard USD 250,000 limit already in place – and the Fed initiated a novel short-term lending facility called the Bank Term Funding Program to enhance the liquidity positions for U.S. banks. Other central banks have also enacted similar liquidity-boosting measures worldwide to bolster investor and depositor confidence.

For the Fed, the difficult task of engineering a “soft-landing” has become even more challenging 

Investors expect rate cuts in near-term after banking turmoil

Note: Base case derived from consensus of economists polled on Bloomberg
Source: Bloomberg, Credit Suisse Asset Management as of 24 March 2023

Volatility in the banking sector can have the same effect as rate hikes because both result in tighter credit conditions and slower economic growth. During the recent bout of banking turmoil, the Fed acted quickly with a public show of support and provided extraordinary liquidity assistance to U.S. banks. Despite these actions, investors expect more from the central bank in the form of rate cuts. Policy rates in the United States are already the highest in recent memory; markets during the recent global banking turmoil quickly repriced their expectations about where policy rates will be over the next two years. Investors now anticipate a much more dovish rate path in the near term and even expect rate cuts to occur in as early as the second half of 2023 and to continue through 2024.

Despite the market’s more dovish expectation, the Federal Reserve continued on its rate-hiking path at its March FOMC meeting and reaffirmed the path communicated in December foreshadowing more rate hikes to come in 2023 before modest cuts are implemented next year. Perhaps more tellingly, in the accompanying monetary policy statement, the central bank noted (emphasis added by author):

The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.” 

Source: Federal Reserve issues FOMC Statement, The Federal Open Market Committee, https://www.federalreserve.gov/newsevents/pressreleases/monetary20230322a.htm (data as per March 27, 2023).

In other words, the Federal Reserve is still much more concerned about containing inflation risks through rate hikes than it is about easing banking stress further through rate cuts.

In this environment, interest-rate volatility will linger and policymakers’ decisions will become increasingly data-dependent. Renewed banking sector anxiety and the tightening of credit conditions heighten the already elevated risks of a global growth slowdown.

Get in touch with Asset Management

Contact us to learn about exciting investment opportunities. We are here to help you achieve your investment goals.

This is a marketing communication

To the extent that these materials contain statements about the future, such statements are forward looking and are subject to a number of risks and uncertainties and are not a guarantee of future results/performance.

Source: Credit Suisse, unless otherwise specified.
Unless noted otherwise, all illustrations in this document were produced by Credit Suisse Group AG and/or its affiliates with the greatest of care and to the best of its knowledge and belief.

This material constitutes marketing material of Credit Suisse Group AG and/or its affiliates (hereafter "CS"). This material does not constitute or form part of an offer or invitation to issue or sell, or of a solicitation of an offer to subscribe or buy, any securities or other financial instruments, or enter into any other financial transaction, nor does it constitute an inducement or incitement to participate in any product, offering or investment. This marketing material is not a contractually binding document or an information document required by any legislative provision. Nothing in this material constitutes investment research or investment advice and may not be relied upon. It is not tailored to your individual circumstances, or otherwise constitutes a personal recommendation, and is not sufficient to take an investment decision. The information and views expressed herein are those of CS at the time of writing and are subject to change at any time without notice. They are derived from sources believed to be reliable. CS provides no guarantee with regard to the content and completeness of the information and where legally possible does not accept any liability for losses that might arise from making use of the information. If nothing is indicated to the contrary, all figures are unaudited. The information provided herein is for the exclusive use of the recipient. The information provided in this material may change after the date of this material without notice and CS has no obligation to update the information. This material may contain information that is licensed and/or protected under intellectual property rights of the licensors and property right holders. Nothing in this material shall be construed to impose any liability on the licensors or property right holders. Unauthorised copying of the information of the licensors or property right holders is strictly prohibited. This material may not be forwarded or distributed to any other person and may not be reproduced. Any forwarding, distribution or reproduction is unauthorized and may result in a violation of the U.S. Securities Act of 1933, as amended (the “Securities Act”). In addition, there may be conflicts of interest with regards to the investment. In connection with the provision of services, Credit Suisse AG and/or its affiliates may pay third parties or receive from third parties, as part of their fee or otherwise, a one-time or recurring fee (e.g., issuing commissions, placement commissions or trailer fees). Prospective investors should independently and carefully assess (with their tax, legal and financial advisers) the specific risks described in available materials, and applicable legal, regulatory, credit, tax and accounting consequences prior to making any investment decision.

Important information for investors in Netherlands
This marketing material is distributed to professional clients by Credit Suisse Fund Management S.A.
© UBS 2023. All rights reserved.

Distributor: Credit Suisse Fund Management S.A.1, 5 Rue Jean Monnet, L-2180 Luxembourg I Language version available: Dutch I Supervisor (Entity of Registration): Commission de Surveillance du Secteur Financier (CSSF), 110 Route d’Arlon, L-1150 Luxembourg, Tel.: +352 2625 11, Fax: +352 2625 1, Website: https://www.cssf.lu/
1 Legal entity, from which the full offering documentation, the key investor information document (KIID), the fund rules, as well as the annual and bi-annual reports, if any, may be obtained free of charge.