Three Weeks On, What Did We Learn From the Banking Crisis?

Implications of the ongoing volatility in the banking sector, and what it means for markets in Europe and globally—check out highlights from our most recent discussion with Kim Catechis, Investment Strategist, Franklin Templeton Institute.

Completing our cycle of three webinars on volatility in the banking sector, Kim Catechis, Investment Strategist, Franklin Templeton Institute, gave his perspective on recent events, where we are now, and what the implications are for markets in Europe and globally.

Three weeks after the collapse of Silicon Valley Bank (SVB) and two since UBS took over Credit Suisse, what have we learned?

The markets appear to have largely digested the events of the last three weeks, but investors are reminded of a few banking sector “home truths” that remain constant:

  • Banking, like investment, is all about confidence.

While many understand that deposits are (mostly) guaranteed, it is hard for concerned customers not to withdraw cash during periods of market stress. This is why regulators in the United States acted fast and dealt with these concerns comprehensively. Another learning is that confidence in a bank is also built on its capital structure, as well as its capital adequacy. This episode emphasizes the need for trusted institutions and regulatory oversight, both of which international investors appreciate. That is a global phenomenon.

  • Recent events might strengthen the arguments against looser regulations.

Until a month ago, there were strident voices in the United States and the United Kingdom demanding looser regulation, in the name of competition. However, in light of recent events, we should expect increased regulation and oversight globally. Some of those new regulations may have the effect of slowing economic growth, and raising the cost of funding for banks and the cost of doing business for entrepreneurs. For those whose deposits were made whole, this may be viewed as a price worth paying.

  • Marketable securities will have to be considered riskier than we had thought.

Liquidity in accounting terms comes in many varieties, some of which are not cash at all. While depositors don’t usually consider the balance sheet strength of the bank they choose, from an investor’s standpoint, it appears that this is exactly the sort of depth of due diligence that is required to avoid surprises. When interest rates are rising, US Treasury bills may be safer than equities, but they do not keep pace with future interest rate increases. This mismatch can erode bank liquidity, as it did with SVB.