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In his annual letter to investors, the BlackRock founder and chairman questioned whether the dominoes are beginning to fall after years of “easy money”.
Since the financial crisis of 2008, markets were defined by extraordinarily aggressive fiscal and monetary policy, Larry Fink said.
“As a result of these policies, we’ve seen inflation move sharply higher to levels not seen since the 1980s. To fight this inflation, the Federal Reserve in the past year has raised rates nearly 500 basis points. This is one price we’re already paying for years of easy money — and was the first domino to drop,” he said.
Mr Fink believes the biggest bank failure in more than 15 years, Silicon Valley Bank, is a “classic asset-liability mismatch”. He acknowledged that two smaller banks failed in the past week as well.
“It’s too early to know how widespread the damage is,” he said. “The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge. Will asset-liability mismatches be the second domino to fall?”
The BlackRock chairman pointed to previous examples where rising interest rates had been detrimental to financial institutions.
“Prior tightening cycles have often led to spectacular financial flameouts — whether it was the Savings and Loan Crisis that unfolded throughout the 80s and early 90s or the bankruptcy of Orange County, California, in 1994,” he said. “In the case of the S&L Crisis, it was a slow rolling crisis — one that just kept going. It ultimately lasted about a decade and more than a thousand thrifts went under.
“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming.”
Credit Suisse in trouble
While the collapse of Silicon Valley Bank spooked financial markets this week, over in Europe, financial institutions fear for the future of investment banking giant Credit Suisse.
The bank’s share price plunged by more than 30 per cent after major shareholder Saudi National Bank revealed it would not increase its investment in the embattled lender.
Switzerland’s central bank and financial markets regulator were quick to calm fears that banking problems in the US had impacted European lenders.
“The Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) assert that the problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets,” SNB and FINMA said in a statement.
“The strict capital and liquidity requirements applicable to Swiss financial institutions ensure their stability. Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks.”
However, the central bank admitted that it would bail out Credit Suisse if required: “If necessary, the SNB will provide CS with liquidity.
“FINMA and the SNB are following developments very closely and are in close contact with the Federal Department of Finance to ensure financial stability.”