Crisis a different scenario to 2008, insists CEO
In the wake of the banking sector crisis, AGF Management Ltd CEO and Chief Investment Officer Kevin McCreadie, MBA, CFA® believes a pause in interest rate hikes may be "wishful thinking" but that there are still good reasons to believe a bigger crisis can be avoided.
The swift response of US regulators to protect depositors and the efforts of some regional banks to strengthen their balance sheets have provided a level of assurance for the economy and the banking system amidst market volatility.
The CEO also noted that this crisis, which saw the collapse of Silicon Valley Bank and Signature Bank, is different from the 2008 financial crisis because it's a liquidity issue rather than a solvency one. Dposits that purchased US Treasury securities are now struggling due to the swift rise in rates.
"In other words, this doesn’t appear to be another 2008-era financial crisis. In fact, it is a different scenario. The Great Financial Crisis was a crisis of 'solvency,' whereby deposits funded assets that were impaired or worthless. This, however, is a 'liquidity' crisis. Deposits that sat on bank balance sheets and purchased US Treasury securities are now under water given the swift rise in rates," he said.
McCreadie believes it is crucial that certain regional banks have taken measures to strengthen their financial positions. These banks have utilized various sources, such as the Federal Reserve and some major commercial banks, and are now better equipped to handle any further escalation of the current crisis, including potential bank runs.
As for monetary policy, in the future there is growing speculation that the US Federal Reserve (Fed) will stop raising rates, but the CEO believes this could be wishful thinking. The Fed has clarified that it considers higher rates necessary to bring inflation back down to its target level. While equity markets may press for an immediate rate cut, it's unlikely to materialize unless the crisis in confidence around the banking sector spreads beyond regional players to larger banks.
“There’s growing speculation that the Fed will stop raising rates – and even start cutting – because of SVB’s failure, which was, at least in part, the result of interest rates rising too much and too quickly in the first place,” he added.
To sum it up, the collapse of two US banks has undoubtedly made markets more volatile. Still, investors need to be careful about overreacting to every shift in direction and stay calm amidst the uncertainty about the Fed's next move and the overall state of the economy and banking system.
“As such, investors need to be careful about overreacting to every shift in direction that takes place in this type of environment. When there’s this much tumult, it’s usually better to stay calm,” he added.
