• Collapse of some US regional banks
• Experts see no major risk of international banking crisis
• Creeping effects on the US economy
In March, crypto-friendly bank Silvergate Capital announced its voluntary liquidation. Shortly thereafter, the Silicon Valley Bank (subsidiary of the SVB Financial Group), which specializes in financing tech startups, and Signature Bank collapsed. The collapse of the US banks also increased the pressure on Credit Suisse, which had been in trouble for some time, ultimately leading to the decision that Switzerland’s second-biggest bank be taken over by its larger rival, UBS. Since then, other US financial institutions have stumbled and another collapsed, the First Republic Bank.
Experts see no great risk of a chain reaction or international banking crisis
Concerns about the banking sector arose on the market as early as March – not only about the US market, but also about the banking crisis spilling over into the European market. But despite the sell-off on the stock market in the meantime, many experts appeared relatively calm and saw no major risk of the European banking sector spreading or an international banking crisis.
The market pointed out that the business model of the US regional banks was ultimately fatal. While Silvergate Capital was troubled by its focus on crypto services in the wake of the crypto debacle, Silicon Valley Bank and California-based First Republic Bank specialized in tech startups and wealthy clients. Because these customers often have assets in their accounts that exceed the legal insurance limit of $250,000, panic withdrawals ensued after doubts about the banks’ reliability were raised. These arose because the management of the banks had not managed interest rate and liquidity risks effectively. The banks invested large amounts in long-dated and low-interest bonds – which are actually among the safest investments – in the course of the tightening of the monetary policy but lost a lot of value due to the US Federal Reserve.
Stock market expert Jim Cramer also recently stated on his investment show “Mad Money” at CNBC that he does not assume that the poor deposit situation and weak earnings figures at First Republic Bank will trigger a chain reaction. In his opinion, the bank’s problems stemmed largely from its inability to bail itself out despite billions in aid. “There is a big difference between now and 2008: This time there is no systemic contagion,” said Cramer. “It’s a miserable moment for First Republic – once a bank loved by the rich and famous – but everyone else is on the all clear,” said the former hedge fund manager.
Banking crisis could become a catalyst
However, as CNBC reports, the banking crisis could still become a catalyst for a possible imminent recession this year. While large financial institutions such as JPMorgan, Bank of America and the like appear far less affected by the withdrawal of deposits, it is a different story for some smaller banks like First Republic – some of which are struggling to survive. That means the money pipeline to Wall Street remains mostly alive and well, while the situation on Main Street is much more evolving. “The small banks will lend less. This is a credit hit in Central America, on Main Street,” told CNBC Steven Blitz, US chief economist at TS Lombard. “That’s negative for growth.”
But how negative this development really is for growth will only become apparent in the coming weeks and months. According to Robert Sockin, global economist at Citigroup, banks’ quarterly figures for April confirmed “that bank stress stabilized by the end of March and was limited to a limited number of banks,” which was “about the best” after the March bank quake macro results one could have hoped for”, but problems and concerns smolder – as evidenced by recent First Republic news and rumors of a possible sale of PacWest or Western Alliance – and the future of the banking sector remains uncertain for the time being .
US economic growth below expectations
Despite the problems in the banking sector, the US economy grew in the first quarter – but not nearly as much as expected. US economic growth more than halved in the first quarter amid aggressive rate hikes by the US Federal Reserve, Reuters reported. According to the Department of Commerce in Washington, gross domestic product from January to March increased by only 1.1 percent for the year – the housing market and investments weakened. Economists had previously expected growth of 2.0 percent. “Private households and companies in the USA are also feeling the effects of the rise in interest rates and energy prices,” said NordLB analyst Bernd Krampen, according to Reuters, explaining the slowdown in economic momentum.
Private consumer spending surprises on the upside
While economic growth in the USA was significantly weaker than expected overall in the first quarter, private consumer spending at the start of the year surprised positively despite persistently high inflation. They increased significantly by 3.7 percent. “Households benefited from the ongoing strong labor market and special effects such as the pension increase and income tax relief,” quoted the Reuters news agency as Commerzbank economist Christoph Balz. Meanwhile, exports rose 4.8 percent, while business investment grew just 0.7 percent and residential construction contracted again. The higher interest costs would have had an impact here. Economic growth was also slowed down by the fact that companies were not replenishing their inventories as much.
And according to CNBC, further development also depends heavily on consumers, who make up more than two-thirds of all US economic activity. While demand for services is reaching pre-pandemic levels, cracks are now forming. In addition, it is expected that in addition to the increase in credit card balances and payment defaults, another obstacle is likely to arise with the tightening of credit standards.
“Before this really started to unfold in early March, you were already seeing signs of contraction and lending restraint,” quoted CNBC by Jim Baird, chief investment officer at Plante Moran Financial Advisors. “You’re seeing reduced demand for credit as consumers and businesses start to pull in the deckchairs.” Baird can therefore not imagine that the US economy can completely prevent a recession. “The real question is how far the strength of the labor economy and the still substantial cash reserves that many households hold can push consumers and keep the economy on track,” he said.
Is a recession imminent?
Many experts are not ruling out a recession for the second half of the year. However, Blitz and many of his peers still expect the recession — if it comes — to be shallow and short-lived, according to CNBC. “That always tells me everything. Can you have a recession that isn’t led by cars and real estate? Yes, you can. It’s a recession that’s caused by loss of wealth and loss of income and it eventually affects everything,” Blitz said. “Again, this is a mild recession. A 2008-2009 recession occurs every 40 years. It’s not a 10-year event.”
Editorial office finanzen.net
Leverage must be between 2 and 20
No data
More news about Bank of America Corp.
Image sources: interstid / Shutterstock.com, conrado / Shutterstock.com