Whether the failure of SVB and rescue of Credit Suisse develops into a more serious crisis depends on these things. Find out what they are
The reported decision to write off the subordinated “Additional Tier 1” bonds could also dent confidence in that asset class, especially if other institutions get into trouble, he said.On the pro side, the global banking system remains well capitalized, he said. New tools are in place to provide liquidity, such as the currency swap lines between central banks that the Federal Bank, Bank of Canada and other central banks bolstered yesterday.
However, “containing crises is a bit like a game of whack-a-mole – with new fires starting as existing ones are extinguished. A key issue over the next week will be whether problems arise in other institutions or parts of the financial system.”Article contentThere are three areas to watch, says Shearing. First, more financial institutions could struggle with unrealized losses, which totalled US$620 billion for all U.S. banks and financial institutions at the end of 2022, according to the U.S.
Capital believes the U.S. banking system is in good enough shape that unrealized losses on bond portfolios won’t spark a system-wide crisis. Moreover, if an institution does need to raise cash, it should be able to use Fed facilities to do so. Lastly, though many of the recent problems relate to bad management of interest rate risks, a more serious crisis could emerge if you add credit risk to the mix. Banks are likely to tighten lending conditions after the events of the past week, which could develop into a “vicious circle” in which tighter credit leads to a slower economy which leads to rising defaults. Shearing says economies with overvalued housing markets face the biggest threat of this .
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