Global Finance | 20 March 2023

Banking sector: A drop in confidence but not a systemic shock

Volatility within the banking sector is due to very specific issues with the banks affected. We would therefore not expect it to become a deeper, industry-wide issue.

Current volatility within the banking sector is not a wide-reaching, systemic issue but a drop in confidence brought about by, and specific to, a few banks.

There has been turbulence in the banking sector since Silicon Valley Bank (SVB) in the US collapsed over a week ago. Concerns over liquidity spread to other banks, large and small, and issues at Swiss bank Credit Suisse led to rival UBS buying it following emergency talks over the weekend.

While this spooked investors and caused market falls, the reality is the broader banking sector remains well-capitalised and highly regulated. On that basis, whilst the events of recent days have created market volatility, we do not see them as a likely catalyst for a systemic shock to the global banking system.

Issues with the banks that got into trouble were very specific to those banks, relating to their own challenges and business models. While the exact causes were different, they shared a common thread – the structure of their deposit books and how the banks were run.

Banks have been buying bonds over the last decade as they can deliver better returns than cash, but they come with credit risk and are exposed to interest rate rises – of which we’ve seen a lot since last year. That can lead to losses, but we would expect most banks to hedge against this interest rate risk and therefore be relatively insulated against it.

Strong, swift support

It’s also worth noting that the authorities and other banks have been swift and specific in the action they’ve taken to support the sector – in the US and Europe. The emergency deal by Credit Suisse, UBS and Swiss regulators was agreed extremely fast, and about $300 billion of emergency funding has been provided by the US Federal Reserve as part of its standard liquidity operations.

Meanwhile, UK central bank the Bank of England has welcomed the UBS-Credit Suisse deal and stressed that UK banks are safe. In a statement, it welcomed “the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability”, and added that, “the UK banking system is well capitalised and funded, and remains safe and sound”.

However, it will take time for markets to digest recent developments and the various support packages put in place, and we are likely to see ongoing market volatility. We will continue to monitor the situation closely, but we believe the authorities’ actions should ensure this drop in confidence in specific banks doesn’t spread more broadly.

The value of investments can fall as well as rise and you may not get back what you put in. Past performance should not be seen as an indication of future performance. You should continue to hold cash for your short-term needs.