The distress experienced by Silicon Valley Bank is clearly not unique to that company.
On March 14, CUESolutions provider Cuna Mutual Group hosted a Special market update: Bank crisis webinar discussing the current state of the market related to the banking crisis. Since Tuesday, the stream of headlines covering possible financial contagion has been fast and furious. Policymakers are engaged in a game of whack-a-mole as additional banks that have been negatively impacted by the recent spike in interest rates become known. The distress experienced by Silicon Valley Bank is clearly not unique to that company.
Signature Bank, First Republic Bank, Silicon Valley Bank, and Credit Suisse Bank have either collapsed or are teetering. Rescues are being attempted by public and private entities, including the standup of a 2008-style 90-day lending facility for banks by the Fed. The results of those efforts have been mixed.
So far, the challenge looks like a lot of little fires rather than a blazing inferno as we experienced during the previous financial crisis. Most of the impacted institutions had business models that were outside the norm for traditional banks. Credit Suisse is the biggest among them, but its credit default swaps indicated distress as far back as last year. The unique risks associated with each bank became more real and difficult to manage as rates rose. A negative and sometimes existential inflection point was independently reached for each.
As covered in the webinar, we’re vigilant for contagion that could come in two forms:
- hard contagion that is direct and measurable among a failed bank’s counterparties, and
- soft contagion that comes as lost confidence in the financial system.
The latter is far more difficult to ringfence with policy interventions, and it is that form that links otherwise independent risks. Any signals sent by markets about its possible emergence will be important in the near term. Interest rate markets are especially likely to continue their recent gyrations.
Despite the breakneck pace of events, it is important for investors to stay grounded and not get ahead of a story that is still being written. Staying diversified will likely benefit investors as current challenges unfold and are ultimately resolved. We’ll keep you posted with developments along the way.
Scott D. Knapp, CFA, is the chief market strategist with Cuna Mutual Group. Scott is responsible for investment philosophy development and program implementation for Cuna Mutual Group’s Institutional Retirement Programs. He regularly speaks at economic and investment forums across the country. Connect with Scott on LinkedIn.