Nancy Curtin, London-based partner, global CIO and head of investment advisory at global investment firm AlTi Tiedemann Global, does not expect the recent woes at Silicon Valley Bank and other banks to endanger the whole banking sector.
"So far, the banking stress has been a classic liquidity crisis worsened by mobile banking and social media, and not a credit crisis such as in 2008," she said by email on Wednesday.
The U.S. banks in this latest imbroglio shared several things in common, she noted, including extremely poor risk management, exposure to risky parts of the economy (like venture capital and/or crypto) and a large base of uninsured deposits that moved quickly as the crisis took hold.
"These banks were weak links when the system came under pressure, and we see these bank failures as largely idiosyncratic and not a harbinger of contagion risk across the system," she added.
However, she indicated that the crisis will likely to lead to more government regulation, with Congress already looking to mandate that banks with more than $100 billion in assets undergo stress tests and hold more capital against the risk of unforeseen deposit withdrawals.
In addition, many regional banks have witnessed significant outflows as consumers have moved deposits to larger banks for safety reasons or to money market funds in search of better yield, she noted.
"With banks across the system experiencing these regulatory and likely profitability constraints, we feel they will become more cautious, and the tighter credit and lending conditions could well slow the economy, but we feel only to the extent of a mild recession sometime in the second or third quarter of this year," she said. "Banks may also lose market share to larger banks and or other private and direct lending providers."
But there is a silver lining to all of this.
"We may (now) be closer to peak Fed rates," she proposed. "Markets are forward looking and already beginning to anticipate that the Fed may be able to pause rate hikes and perhaps ease conditions later this year or into early 2024. The Fed itself only expects one more rate hike (this year)."
For the time being, Ms. Curtin suggests that institutional investors be aware of risks to the banking sector, as there are likely going to be more challenges to profitability, particularly outside the larger banks.
However, she observed that banks are "different beasts" today than 15 years ago during the global financial crisis, and they will recover at some point.
The banking system, particularly the larger banks in both the U.S. and Europe, are better capitalized now than in 2008, she noted. European banks are also in a strong capital position, with capital ratios near that of the U.S. large "systemic" banks.
Some recent actions by the U.S. Treasury Department and the Federal Reserve — as well as similar steps taken by the Swiss National Bank and assurances from the European Central Bank to protect the system — have brought stability to the banking sector for now.
"One can never be sure, but we take comfort that policymakers understand confidence in an economy's banking system is non-negotiable and paramount to preventing systemwide contagion," she said. "While bank stock earnings and bond holders could still be at risk, policymakers will do what it takes in our view to protect depositors at banks deemed to be systemic."
AlTi has about $60 billion in assets under management.
