Strategy blog: The return of bank risk?

  • Credit Suisse solvency fears move into focus following SVB collapse last week
  • Central bank interventions soothe fears of ongoing contagion
  • Investment view unaltered: overall risk appetite is unchanged


What happened?

Risk assets have partially rebounded following a slump driven by ongoing contagion fears within the banking system. The focus has shifted from the US towards Europe, where Credit Suisse has been the focus of anxiety.

The trigger for Credit Suisse’s latest slump was its delayed annual report, which revealed weakness in its financial reporting, alongside the public decision by one of its key shareholders, Saudi National Bank, to refrain from providing any further capital.

For now, fears have been soothed by liquidity interventions by the Swiss National Bank – which has committed to provide capital to systemically important institutions (‘too big to fail’) – which echo commitments made in respect of SVB by the US Federal Reserve last week. The European Central Bank also stands ready to intervene if necessary, even as it continues to raise interest rates to tackle inflation.

Have macro risks suddenly intensified?

Analysts who suggest that we shouldn’t worry may be missing the point: after the GFC in 2008, worry is a given. It was inevitable that higher interest rates would eventually expose some cyclical cracks in financial sectors and the wider economy.

However, a full-blown financial crisis need not follow - comparisons with the European Debt Crisis in 2011 or indeed the GFC seem misplaced. The challenges faced by Credit Suisse (and SVB) are not symptomatic of the wider banking system. Credit Suisse’s issues, for example, are well known and have been brewing for several years – the bank’s seemingly permanent strategic restructuring, including asset sales, job cuts and capital raisings, and its accident-prone management, are reflected in its share price. Even before this week, it had fallen by 90% since the start of 2010, while the wider European banking sector is up by 5% (both in euro terms).

From a fundamental standpoint, as we’ve noted recently, the banking system is most likely safer now: capital and leverage ratios are far stronger than they were in 2008. That’s not to say further liquidity risks won’t emerge, but the system is much better capitalised, and the central banks have been quick to respond – undoubtedly, the experience of the GFC is a warning against delay or inaction.

Investment conclusion unaltered, for now

From a top-down perspective, this latest development refocuses cyclical risk squarely on earnings, and away from interest rates (where expectations of further tightening have tumbled, and rate cuts are once again being priced in by year-end). But the prompt central bank and regulatory interventions, together with reduced systemic risk, may prevent the episode developing into a full-blown crisis. And in the meantime, there have still been no dramatic economic signals – if anything growth appears to be turning a corner and improving, while inflation continues to (mostly) subside. Policy tightening may well slow or even pause in the short term given the implicit additional tightening of financial conditions represented by heightened banking volatility, but when the dust settles, we doubt the likely profile for rates will have altered significantly.

For now, we do not think an outright reduction in risk assets from current levels is appropriate.

Ready to begin your journey with us?

Past performance is not a guide to future performance and nothing in this blog constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.

Read more articles

  • Perspectives podcast: The last mile

    Market Perspective

    The Swiss National Bank's decision to reduce interest rates came as a surprise to the market. Join our Global Investment Strategists to decode central banks' moves, unravel oil market dynamics, and track gold and bitcoin prices.

  • A rebound in corporate earnings?

    Strategy Blog

    Earnings growth is rising in the United States, suggesting the market could have passed a turning point. Ahead of the release of first quarter earnings figures, we consider what this means for investors and examine how earnings expectations can be fallible.

  • Asset Management: Monthly Macro Insights - April 2024

    Market Commentary

    Recent data suggest that inflation could prove persistently high for some time and limit the room for central bank easing. Despite this high-for-long path for policy stances, investors remain convinced it will not prove sufficient to derail global growth.

  • Are oil prices pushing inflation higher?

    Strategy Blog

    Oil prices are up by a fifth since January, but should we be worried this will sustain higher inflation? We consider how demand may be firming up as the depressed manufacturing sector picks up, and the impact that could have on demand for raw inputs like oil.

  • Einblicke: Q2 - 2024 - Potenziell weiterer Aufwind in bestimmten Branchen

    Insights

    In unseren aktuellen "Einblicken" werfen wir einen Blick auf das abgelaufene sowie das kommende Quartal. Wir zeigen zudem auf, wie sich die Vermögensverwaltung von Rothschild & Co Deutschland im derzeitigen Umfeld positioniert. Lesen Sie jetzt die Einschätzungen unserer Experten.

  • Stock market optimism prevails in March

    Monthly Market Summary

    Global equities continued their upswing, rising by 3.1% in March (USD terms), while government bonds were also up by 0.7% (USD, hedged terms).

Back to top