The credit crunch returns
A US credit crunch appears to be underway, says Michael Wilson of Morgan Stanley. Last month’s banking crisis was expected to cause a tightening in lending conditions. Now the first signs of a squeeze are emerging. US Federal Reserve data shows that commercial bank lending fell by nearly $105bn in the two weeks to 29 March, the biggest drop in data going back to 1973. “Almost $1trn in deposits have left the banking system” since the Fed began raising interest rates last year. That is forcing banks to “sell mortgages and Treasuries at a record pace to offset deposit flight” while tightening lending standards.
“Banks were reluctant to lend even” before the collapse of Silicon Valley Bank (SVB) precipitated last month’s crisis, says The Economist. As Mike Scott of asset manager Man Group notes, “lending standards had tightened to levels that, in previous business cycles, preceded recessions”. Now the lending screws are being tightened further. Investors are “shunning bank shares”. Yet the broader market has shrugged off the trouble, says Katie Martin in the Financial Times. America’s S&P 500 index has gained 7% since regulators took over SVB on 10 March.
Have rates peaked?
Some are still nervous: the 2008 crisis was “a tragedy in several acts” that took months to unfold. But most on Wall Street have concluded that “the string of bank failures has passed without morphing into something uglier”. If anything, the trouble has helped shares by slashing expectations for how high US interest rates will go before peaking. Two-year US government bond yields, a proxy for rate expectations, have dropped by a percentage point since March.
Those inclined to a glasshalf-full view will note that last month’s demise of Credit Suisse, a globally systemic bank, ultimately caused little “more than a temporary wobble in financial markets”, says a note from Capital Economics. The “much-ballyhooed” post-2008 reforms to the banking sector “have indeed made the core of the global financial system more robust”. But some banks are clearly struggling to adapt to higher interest rates after a long period of ultra-loose money: “Further casualties are likely over the coming months.”
The turmoil at US regional banks and Credit Suisse may appear to have been “idiosyncratic” problems, says Neil Shearing, also of Capital Economics. Yet “a common thread” is that “management failures” only came to light once the easy-money tap was turned off. A “full account” of last month’s crisis may “take years” to emerge, but a key early takeaway is that “panic and fear” spread much more quickly in the digital age. “The collapse of SVB... the second-largest bank failure in US history, took place in just 36 hours... regulators and policymakers have some catching-up to do.”