Investors fear new banking crisis
Whe wanted to benefit from the drastic interest rate hikes on the stock exchange to curb inflation, has recently liked to focus on financial stocks. But now the tide has turned significantly: The crisis surrounding the Californian start-up financier Silicon Valley Bank shows that rising interest rates can also weigh on banks. On the one hand, these bring higher interest income and boost profits. However, this calculation was thwarted by the fact that rising interest rates on the money market are causing many savers to look for better offers elsewhere.
To make up the gaps from the outflow of funds, many banks have been forced to sell holdings of bonds, the value of which has fallen as interest rates have risen. The consequences are losses and the fear of increasing selling pressure on the bond market. At the Wall Street bank stocks suffered their heaviest losses since June 2020 on Thursday Silicon Valley Bank fell 60 percent as the Menlo Park, California-based institution needs a billion-dollar capital raise to cushion losses. However, there was also significant downside across the broader sector, from smaller players to industry giants like JPMorgan Chase. whose shares closed 5.4 percent in the red.
Is it an isolated case?
In Frankfurt, Deutsche Bank AG shares fell 7 percent on Friday, Commerzbank fell 4 percent in Xetra trading and Credit Suisse shares in Zurich fell 4.6 percent. Bank bonds were also under pressure. The price losses caused the risk premiums to rise. “Today’s news highlights a risk that most investors don’t seem to realize,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “This may be an isolated case. But the concern is that other banks could now report similar problems.”
Hedge fund manager Bill Ackham called for government aid for Silicon Valley Bank. The US government should consider a “highly dilutive” bailout if capital markets fail to find a solution, suggested the founder of activist hedge fund Pershing Square. The importance of the bank lies in the fact that many young companies financed by venture capitalists use it as a lender and keep their working capital there. A bank failure could damage a long-term stimulus for the economy, Ackman explained in a series of tweets.
“US banking system as a whole solid”
On the other hand, Mohamed El-Erian, the former head of the Allianz fund division Pimco, tries to calm down. US banks would get the contagion risk and systemic stress from the turmoil surrounding Silicon Valley Bank under control, he said on Friday. “By carefully managing balance sheets and avoiding further policy mistakes, the risk of contagion and the systemic threat can be easily managed,” El-Erian wrote on Twitter. “The US banking system is solid as a whole, which doesn’t mean every bank is.”
As recently as last week, US bank stocks were up year-on-year amid news that corporate deposits fell in 2022 for the first time since 1948. Sudden sell-offs are considered particularly alarming on the stock exchange by banks. Because of their role as financiers, they are often assumed to provide signals to the broader market. This week’s drama is likely to be grist to the mills of those warning of a recession.
“I don’t think that’s an early warning sign, but I have a feeling the market sees it that way,” said Art Hogan, chief market strategist at B. Riley Wealth. So far, analysts had expected higher interest income. That confidence is now being tested, according to Michael O’Rourke, chief markets strategist at JonesTrading. So far, “the reality has been consistently ignored that the higher interest rate environment will create headwinds for companies going forward,” he said. “From my point of view, this underlines that rising interest rates do play a role after all.”
