The ongoing banking debacle is not a rerun of the global financial crisis – neither its good nor its bad bits

INVESTORS these days are constantly confronted with crises. In early 2020, the Covid pandemic was spreading across many countries. In early 2022, Russia invaded Ukraine.

Recently, a banking crisis erupted. Three banks in the US failed this month: Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank.

Over the weekend, the Swiss authorities engineered a deal for UBS Group to buy the teetering Credit Suisse Group – supported by billions in state funding.

Are we seeing a repeat of the global financial crisis of 2008, which culminated in Lehman Brothers’ bankruptcy in September 2008?

I was part of the collateral damage of that crisis when I lost my job at a US financial house in late 2008.

One despairs over why banks fail, despite regulators working hard to ensure financial stability, and banks presumably managing risk assiduously.

Technology may be making any loss of confidence in banks even scarier. News of a bank’s weakness can spread and customers can withdraw their deposits, all in rapid time.

Limited near-term damage

The good news is that the current banking crisis may be much less damaging than the global financial crisis.

Sure, many good jobs will be lost in the financial-services sector during this crisis. But what has been impressive thus far is the swift and aggressive response of regulators.

Credit Suisse has been rescued. A weak bank is now part of a stronger one. A big price is being paid by bondholders, who have witnessed US$17 billion of Additional Tier-1 (AT1) debt written down to zero.

In the US, the Federal Reserve has created an emergency lending programme to provide loans of up to one year in length to financial institutions. Collateral such as US Treasuries will be valued at par instead of their open-market value, so a bank can borrow on asset values that have not been impaired by the rapid hikes in interest rates since 2022.

Moreover, the US government stepped in to back SVB and Signature Bank deposits beyond the federally insured ceiling of US$250,000.

As help is deployed to US banks, who are experiencing mark-to-market losses on their holdings of US Treasuries, it is hoped that customers will not lose confidence in their banks.

The global financial crisis traced its roots to the bursting of the housing bubble in the US. The collapse of housing prices led to subprime mortgage loans held by financial institutions becoming virtually worthless.

The problems in the housing market destroyed household wealth in the US. Consumption collapsed, and business investment fell, while unemployment soared. Weakness in the US consumer sector reverberated across the global economy.

This time round, there is no housing crisis in the US. Employment numbers in the US and many developed countries are strong. Perhaps, the real economy can chug along relatively unscathed amid the travails of the banking sector.

Unexciting prospects

Investors should be relieved to find that this year’s banking crisis is not the global financial crisis. But while a crisis can create opportunities for equities investors, bad news looms.

Even if calm is restored in the banking system in the US and Europe, what follows will not be pretty.

First, credit conditions are set to tighten. Bond investors will be more careful over what they buy, given that even relatively good-quality bonds such as Credit Suisse’s AT1 bonds can become worthless.

Many banks will become more selective in extending credit amid heightened concerns over preserving capital. Expect some businesses and consumers to suffer from an inability to access credit, which will slow economic growth.

Second, do not bet on equities markets soaring to new heights, propelled by ultra-low interest rates, after overcoming jitters in the banking system.

The US equities market enjoyed a multi-year bull run starting in late March 2009 – several months after the collapse of Lehman Brothers. That bull run was largely driven by extremely low interest rates, which were a response to the global financial crisis.

This time round, the need for financial stability may cause the Fed to go slower on hiking rates, keep peak rates lower and move faster on lowering rates subsequently.

The fed funds rate could stabilise over the next year in the 3-to-4 per cent region, instead of sub-1 per cent. Inflation in the US could subside, but struggle to go down to 2 per cent or less.

Thus, low interest rates inflating asset prices – via the use of low discount rates to value future earnings – may not return.

Third, strong economic drivers could be absent over the next few years.

China’s economy grew strongly though the global financial crisis. The country’s robust economic growth over much of the 2000s helped the world economy enormously.

China’s opening up post-Covid can help many economies in the near term. The country’s economy may not grow as rapidly as in the recent past, though, due to a maturing economy, an ageing population and some decoupling with the US.

Government finances of many Western developed countries have taken a toll from fighting the Covid pandemic. These countries are experiencing additional strains on government purses because of ageing populations and higher defence spending as the Russia-Ukraine war drags on.

Should these economies enter a recession, there may be little fiscal firepower available to spur economic growth.

Overall, the risk-reward for much of the global equities looks fairly unexciting. Still, Singapore equities may fare relatively well.

The three locally listed banks – DBS , OCBC and UOB – have gained from rising interest rates driving up net interest margin. The banks are exposed to Asean countries, which have favourable demographics.

Groups owning Singapore property are in a good spot: physical properties here benefit from the search for safe-haven hard assets amid geopolitical uncertainties.

Banking crises, unfortunately, cannot be avoided entirely. Knowing where the weak spots are in the financial system can be tough.

All this is hardly comfort for investors, but they are a resilient bunch.

Perhaps there will be further weakness in equities markets as the ongoing banking crisis plays out. But as more potential bad news is priced in, greed will overcome fear and animal spirits will return.