Aafter the americans Regulators take control of a failed Silicon Valley bank (SVB), the consequences feel unpleasantly familiar. The biggest bank failure since 2008 followed. Two days later, Signature Bank fell.Another week later, fleeing investors forced 167-year-old Swiss bank Credit Suisse into a hasty alliance with rivals Swiss bankFifteen years ago, a string of such failures sparked a global credit crunch as financial institutions sharply tightened lending standards in an attempt to protect themselves, followed by the worst recession in generations. Is it repeating?
A month later, the answer appears to be a benevolent “no” — or at least “not yet.” Investors are avoiding bank stocks. Banks of some regional U.S. lenders have been brutalized: One is First Republic, whose shares have plummeted more than 90% since February.six days later SVBThe collapse of the bond market was effectively closed, and U.S. companies were not issuing new bonds.
Then, in the second half of March, the shutters reopened, and borrowers and lenders alike flocked. All told, investment-grade issuers sold $103 billion in bonds in March — close to last year’s monthly average despite the one-week hiatus. For such issuers, yields have fallen and “the market has fully opened up,” said Goldman Sachs’ Lotfi Karoui. “The market really hasn’t bought into the idea [the events of March] will turn into a financial crisis. “By the end of the month, even the riskiest issuers can borrow again.
However, even though the risk of a crisis appears to have passed, borrowers remain under pressure. The most obvious source of pressure is the Federal Reserve, which has raised interest rates from near zero to between 4.75% and 5% since last March. For companies that have borrowed $1.5 trillion in loans, often with floating rates, that growth quickly translates into higher debt-servicing costs. For issuers of high-yield bonds, which have borrowed similar amounts and tend to pay fixed coupons that only rise when bonds are refinanced, the full impact has yet to be felt. While the market is pricing in a one percentage point cut in rates this year, Fed governors expect rates to top 5% by the end of the year. The more the threat of a financial crisis recedes, the more likely it is that the Fed’s forecast will prove correct.
Banks were reluctant to lend even before SVB fall down. Mike Scott of asset manager Man Group noted that by the end of 2022, surveys were already showing lending standards had tightened to pre-recession levels in previous business cycles. The unrest in the United States last month, which mainly targeted small and medium-sized banks, may have further intensified the pressure.
Analysts at Goldman Sachs estimate that banks with assets of less than $250 billion account for 50 percent of commercial and industrial loans and 45 percent of consumer loans. This number rises to 70 percent for small companies employing 100 or fewer people. It is these businesses — which employ more than a third of U.S. private-sector workers and produce a quarter of its total output — that are most sensitive to the coming credit crunch.Peter Harvey of Schroders, another asset manager, predicts the result will be “stronger covenants, higher [interest] interest rate spreads, lower issuance, smaller borrowing scales and tighter controls on the exposure of the lender sector”.
The final source of pressure will be the liquidity of firms themselves, which has deteriorated significantly over the past 12 months. After the covid-19 hit, corporate borrowers built up large cash cushions, helped by rock-bottom interest rates and a flood of freshly created money from central banks. In 2020, US investment-grade companies held 6.5% of their assets in cash, more than at any time in the past 30 years.
After the global financial crisis, that figure has dropped to 4.5%, about the same level as in 2010. As a result, if interest rates remain high, companies now have less room to reduce existing cash reserves and are more likely to need to borrow to cover future shocks. The March frenzy in the banking sector may not trigger a repeat of 2008. Still, life is getting tougher for borrowers. ■
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