This Is No 2008
No Big Freeze
While the current liquidity crunch brings negative economic and market consequences, “it will not result in a wholesale freeze across the financial system” in the U.S., Dave Sekera, senior U.S. market strategist for Morningstar Research Services LLC, said in an article last week.
“The 2008 banking crisis was driven by the fact that no bank understood the extent of losses on each other’s balance sheets. The managers that oversee credit-counterparty risk on trading desks halted trading with other banks as they feared … the risk that the other bank could default over the near term. Commercial paper markets froze, interbank lending stopped and trading ground to a halt,” he explained.
“What is different now is that banks do not have the same size holes in their balance sheets as they did then,” Sekera wrote Friday.
In the run up to the earlier crisis, banks took on low-quality mortgages and collateralized debt obligations and “CDO-squared” vehicles, and when the housing bubble popped, these assets were worth anywhere from zero to pennies on the dollar, he added. “Today, the losses on long-dated bonds in hold-to-maturity accounts is much less,” he said.
Morningstar considers fallout from the U.S. bank failures to be manageable, he wrote. On Monday, Sekera told ThinkAdvisor the research firm expects “that the current situation should remain much more limited.”
Over the weekend, UBS agreed to buy stressed Credit Suisse in a deal brokered by Swiss regulators.
“In our view, the issues that drove Credit Suisse into the arms of UBS was idiosyncratic to Credit Suisse and not indicative of broader problems across the European banking system,” Sekera told ThinkAdvisor. “There may be some short term dislocations as the markets digest this news, but expect that those dislocations will be resolved rather quickly.”
Stronger Banking Sector
Jurrien Timmer, Fidelity Management & Research Co.’s global macro director, wrote last week that the Silicon Valley Bank’s collapse “has been primarily a liquidity event — i.e., there were insufficient liquid assets on hand to meet immediate cash demands — rather than a solvency crisis, such as one in which a bank simply has insufficient equity relative to its debt. The financial crisis in 2008 was both, and the regulation that followed has left the banking sector in a much stronger position.”
The mismatch between bank assets and liabilities, however, could affect the banking sector’s profit margins, he noted.
SVB’s collapse “does bring to light the fact that banks have been paying depositors much less than competing short-term vehicles do,” generally offering about 0.5% on deposits compared with a 4.5% average money-market yield, he said.
“Banks may now have to start competing for those deposits, by paying higher rates,” Timmer wrote. “But paying higher rates on deposits could eat into net interest margins … impacting the overall profitability of the financial sector.”
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