By Charlie Conchie
The collapse of Silicon Valley Bank could signal the “dominoes are starting to fall” after an abrupt end to the era of low interest rates and cheap money, the boss of the world’s biggest asset manager BlackRock has warned.
In his annual letter to investors today, Larry Fink said a series of aggressive rate hikes to tame rampant inflation in the past year had “exposed cracks in the financial system” and “something else had to give”.
The global banking sector has been plunged into crisis in the past week after Silicon Valley Bank and two smaller regional lenders failed, prompting jitters across markets and a sell-off in banking stocks.
Credit Suisse is the latest lender to appear to be on shaky ground today, after shares in the firm plunged more than 20 per cent in morning trading.
Fink said SVB’s failure had been down to a “classic asset-liability mismatch” and may be a harbinger of things to come.
“It’s too early to know how widespread the damage is. The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks,” Fink wrote.
“But markets remain on edge. Will asset-liability mismatches be the second domino to fall?”
Fink warned that prior tightening cycles from central banks have led to “spectacular financial flameouts” including the “savings and loan crisis that unfolded throughout the eighties and early nineties”.
“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming,” he added.
“It does seem inevitable that some banks will now need to pull back on lending to shore up their balance sheets, and we’re likely to see stricter capital standards for banks.”
The comments will likely unsettle investors today amid an already turbulent week across the sector. Moody’s downgraded its outlook for the entire US banking sector to “negative” this week.
European banking stocks have plunged this morning, with shares in Credit Suisse tanking more than 20 per cent after one of its main shareholders ruled out providing new funding.
BNP Paribas has fallen around 9.7 per cent, Deutsche Bank 6.9 per cent, Santander 6.6 per cent, and UBS 6.3 per cent.
Freefall: Credit Suisse potentially ‘next shoe to fall’ as bank contagion fears spread across Europe
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