From tranquility to turmoil
For around a year since the Fed began to hike rates in early 2022, all was quiet on the financial front, with the focus of developed-market central banks placed firmly on reining in above-target inflation. Things changed abruptly in early March with the collapses of SVB and Signature Bank and Credit Suisse’s ignominious takeover by fellow Swiss banking giant UBS. Shares and deposits at other banks have since taken a hit amid fears over which institutions are next in line to fail.
The difficulties of higher rates
Central Bank monetary tightening provides the opportunity for commercial banks to widen the spread between the interest rates on deposits and loans, which can boost profits. However, rising interest rates are no panacea, and entail risks in the form of large unrealized losses on bold portfolios, higher rates of unperforming loans, weakness in the property sector, higher debt financing costs and depositor outflows. SVB’s collapse is a case in point; the Bank was particularly at risk due to its unusually large bond portfolio and flighty customers—many of which were tech firms with deposits above the USD 250,000 Federal insurance limit.
More to come
Insights From Our Analyst Network
On European banks, Dennis Huchzermeier, economist at the Handelsblatt Research Institute, said:
On the U.S. economy, analysts at ING said:“The stresses created by the SVB fallout will only make banks more nervous about who they lend to, how much they lend and at what interest rate. […] This could lead to a snowball effect of risk aversion and tightening of lending standards that hampers credit flows [and] weighs on the economy.”
In this special report, we examine recent banking turmoil and its implications. We polled 21 of our analysts to get their insight on the following key questions: