No one who remembers the global financial crisis of 2008-09 or the European banking crisis a few years later will be sitting comfortably after the turmoil of the past week.
✍️ Connecting The Dots
It seemed like everyone this week became a bank analyst, well-versed in fancy terms like available-for-sale or held-to-maturity assets. It’s no laughing matter, of course, but you might crack a wry smile at this newfound expertise, considering no one had even heard of Silicon Valley Bank (SVB) just a few days before. But that tends to be the nature of crises or mini-crises. They cause panic precisely because people don’t see them coming, leaving everyone scrambling to understand what just happened.
But there’s a comforting factor hidden in this too. SVB’s issues at least seem straightforward (an overly concentrated client base, poor risk management, and a run on deposits). The global financial crisis of 2008-09 was a complete mess by comparison: to fully wrap your arms around it, you needed to get up to speed on highly complex things like collateralized debt obligations. And that took a long time. It’s part of the reason why it took the Federal Reserve (the Fed) and its sister authorities months to come up with a solution – the troubled asset relief program (TARP). By then, major banks had endured failures, receiverships, or fire-sales, and the world was staring down a deep recession.
So the fact that US authorities put together a rescue package for SVB’s depositors and offered support for the entire banking system in a matter of hours could be taken as a sign that the core issues here aren’t that complicated, and by extension should (hopefully) be easily resolved. Keep in mind, though, that kind of optimism is relatively common ahead of any major crisis.
1. Smoke signals.
Mind you, smoke’s still billowing out of the European banking sector, leaving investors wondering whether there might be a raging inferno inside. At the center is the long-troubled lending giant Credit Suisse. Now, the bank had issues long before SVB collapsed and filed for Chapter 11 bankruptcy protection, but somehow the West Coast bank’s dramatic failure has people biting their nails about the entire European banking sector, fearful of ripple effects should Credit Suisse go under. So, it looks like this is an old-fashioned confidence crisis, and banks (more than anyone) do rely on their customers’ confidence. So is the writing on the wall for the Swiss giant?
2. Brave face.
The timing couldn’t have been much worse for the Fed and the European Central Bank (ECB), both having their latest interest rate decisions to contend with. On Thursday, the ECB stuck to what was believed to be the plan, hiking rates by half a percentage point, exuding an air of calm. And that could be smart PR. See, not raising rates in the midst of an inflation storm would have signaled it’s more worried about the banking sector than it is about price rises, and that might’ve created even more panic. Let’s see if the Fed does the same when it meets next week…
🎯 Also On Our Radar
Microsoft’s been, ahem, chatting up investors again as it showcased some of ChatGPT’s latest tricks. It’s recently embedded the chatbot into Microsoft’s core Office products, like Excel and PowerPoint. It's clear that the Seattle software giant is in a hurry to get artificial intelligence (AI) into everyone’s lives before anyone else can. And it’s doing its share price no harm in the process.
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