Chris Iggo

Macroscope | No repeat of the 2008 global financial crisis but other dangers lurk

In the US, large banks remain safe but there is little political appetite to throw fiscal support at the smaller, failing banks

In Europe, the shock that Credit Suisse’s AT1 bondholders were made to absorb losses first, continues to reverberate

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Why you can trust SCMP

The bank that started it all: Silicon Valley Bank. A financial chart of its share price is displayed on the floor of the New York Stock Exchange on March 10, before trading was suspended. Photo: Bloomberg

Chris Iggo

Published: 3:45pm, 5 Apr 2023

This is not 2008. But market confidence in banks has been rocked and investors have had to digest significant losses in both the equity and credit markets. There may be more problems ahead as investors withdraw from certain bank-related assets and concerns remain about deposits.

There is also the risk of credit impairments, losses in other sectors such as real estate, and a wave of banks reporting provisions for loan losses. The interest rate market seems to know how this story will end – with rate cuts. If they materialise, fixed income returns will outrun those on cash.

Banks fail when they do not hold enough capital to absorb losses, when they are not able to meet deposit outflows, or when they face a general lack of customers, and investor and counterparty confidence prevents them continuing with business as usual. Valuing a bank from an equity or creditworthiness point of view relies on having transparency on all these things.

But, as events have highlighted, things move quickly. In a world of digital banking, deposit flight can be rapid – and this speed can outpace a bank’s ability to liquidate its assets to meet the outflows. The question for investors now is whether a systemic interest rate shock becomes a credit shock?

If this happens, then valuations of banks must consider potential additional realised or marked-to-market (accounting) losses on their credit and securities portfolios, the increased costs of funding to try and retain deposits, and the provisioning against loan losses as the economy deteriorates with tighter credit conditions. The further underperformance of bank equity and credit assets could be the result.

Policy plays a role in facing a banking crisis. Regulators and governments can provide insurance against deposit losses and/or a backstop to the valuation of assets and facilities which allow banks to use collateral to meet their liquidity needs.

Macroscope | No repeat of the 2008 global financial crisis but other dangers lurk

In the US, large banks remain safe but there is little political appetite to throw fiscal support at the smaller, failing banks In Europe, the shock that Credit Suisse’s AT1 bondholders were made to absorb losses first, continues to reverberate

In the US, large banks remain safe but there is little political appetite to throw fiscal support at the smaller, failing banks

In Europe, the shock that Credit Suisse’s AT1 bondholders were made to absorb losses first, continues to reverberate