The systemic crisis aside, there are repercussions at the macro level.
The bankruptcy of the American bank Silicon Valley Bank continues to cause trouble. If the difficulties of this bank seem to be explained in large part by its very specialized nature and by poor management of its financial risk, it has been the trigger for concern for the banking sector as a whole. At the level of American regional banks first of all, in particular among institutions that may present risk profiles similar to that of SVB.
The alert continues to be high, with in particular tensions on the deposits of certain institutions, but the authorities are taking the risk seriously and should make it possible to avoid a more systemic crisis. The other transmission of the tensions caused by the bankruptcy of SVB was obviously the accelerated takeover of Credit Suisse by UBS, with consequent losses for shareholders and certain creditors. This operation mainly reflects the decline in investor confidence, but also that of depositors towards Credit Suisse. Indeed, the Swiss bank had suffered for several years from very low profitability (even significant losses in some years) due to major litigation but also to risky investment choices. This accelerated purchase comes with strong guarantees from the Swiss government and monetary authorities for the new merged bank. At an international level, the main central banks of developed economies have also announced the reopening of currency swap lines to deal with possible tensions on banks’ foreign currency funding.
Matter of trust
If the markets have been affected by this turbulence, it is important to note that we are not at this stage, in a systemic banking crisis. Indeed, if the uncertainties remain high, the capacities of the financial sector to absorb these turbulences without causing a systemic crisis are even more so. First of all because national American banks as well as European banks present very diversified business models and management of their controlled financial risks. Their capital and liquidity levels provide reassurance regarding their ability to manage rising interest rates. Moreover, the rapid and significant reaction of the authorities suggests that the risks of direct contagion will remain limited.
Macro-level implications
The current turbulence will have consequences for the economic outlook in the short and medium term. First of all, the current climate of uncertainty will weigh on the decisions of all economic players and will tend to slow down economic activity. Moreover, if tensions were to remain limited for European banks and for the major American banks, American regional banks would remain under pressure and might slow down their supply of credit to the American economy. Representing more than 40% of all credit, this might significantly accelerate the transmission of the monetary tightening initiated several quarters ago by the Fed. All in all, the slowdown in activity might be more marked and encourage central banks to be more moderate in their future monetary policy decisions, allowing the tightening cycle to end more quickly than expected. It can nevertheless be underlined that on both sides of the Atlantic, households and companies still have sound financial balance sheets enabling them to cope with and avoid an excessively marked economic slowdown.
Maintain balanced positioning
Despite growing uncertainties, a balanced strategic approach between equities and bonds should be maintained. In fact, a highly diversified positioning provides at least partial protection from turbulence on the equity markets through exposure to the bond markets, which once once more show a negative correlation. Within equities, favor more defensive sectors. Just like an overexposure to the US government bond markets and to the debt of well-rated companies for the attractiveness of the returns offered by these asset classes, as well as to gold, which remains the preferred safe haven. Given the fact that the ECB might raise its rates further, it would be wise to remain neutral on European sovereign bonds. In any case, we must remain very vigilant, in order to be reactive to changes in the situation.
