Introduction
Shares have hit turbulence again with worries about inflation, interest rates, recession and, now, problems in US banks. After rallying strongly at the start of the year the US share market has reversed much of its year to date gain leaving it down 20% from its January high last year and at risk of a retest of its October lows when it was down 25%. Non-US shares are holding up better with Eurozone shares down by 7% & Australian shares also down 9% from their record highs but are vulnerable to moves in US shares. This note looks at the key worries and what it means for investors.
Are we going to see systemic problems in US banks?
Three regional US lenders have collapsed or closed in recent days. Silicon Valley Bank, which had a deposit base from tech (and some crypto) companies and customers, collapsed after running into trouble as deposits were withdrawn in the face of tough conditions in the tech and crypto sectors. Silvergate Capital & Signature Bank, crypto friendly banks, also closed after they were made vulnerable after the collapse of FTX crypto exchange. These closures have led to concerns they may reflect the start of broader problems in US banks. This is quite possible as Fed rate hiking cycles by tightening financial conditions invariably trigger financial stresses - think the tech wreck and GFC. See the next chart.
That banks exposed to tech and crypto either for deposits or lending are in trouble is not surprising as both sectors benefitted from the pandemic and easy money but have been hard hit by reopening and rate hikes. And its made worse where banks have concentrated investments in long term bonds which have fallen in value as SVB did – so if they have to sell them to meet withdrawals it’s at a loss. For example, there are reported to be $US620bn of unrealised losses on securities at US banks – of course it’s only a problem if they have to sell them. But at this stage it’s too early to know if problems at these lenders reflect isolated problems in the tech & crypto sectors they’re exposed to, made worse by undiversified deposit bases & concentrated holdings of bonds that have fallen in value or are a sign of a broader problem in the US financial system.