The recent bank failures in the US— Silicon Valley Bank (SVB) and Signature Bank — have raised concerns for the global financial sector, with fears of a 2008-like global financial crisis. The US government has assured bank depositors will be able to withdraw money in case of any more bank failures. While the turmoil in the US was unfolding, Swiss bank Credit Suisse was merged with UBS after a string of scandals, top management changes and multi-billion-dollar losses.

The fall of the 167-year-old Credit Suisse raises a bigger concern of a global banking crisis, which some say is the result of raising interest rates too fast. But what does this mean for investors? Here is what investment experts have to say.

Bank failures and global financial crisis

The 2008 Global Financial Crisis (GFC) spread like wildfire across the US as well as the rest of the world. However, there are some differences when it comes to bank failures in 2023 compared to that in 2008.

“There are three big differences between the current crisis and the GFC. First of all, inflation today is well above target in developed economies and has persistently exceeded central banks’ forecasts…Second, the financial system then had huge leveraged exposure to the property sector…Finally, of course, we’ve had the GFC and financial regulation has greatly strengthened,” says Steven Bell, Chief Economist, EMEA, at Columbia Threadneedle Investments.

“It’s most likely this collapse won’t have a contagion effect though. For a start, European banks don’t face the same sort of problems as US banks. In the US, authorities have been shoring up confidence and have guaranteed all deposits at SVB, while HSBC acquired the bank’s UK operations,” adds Invesco.

Kevin McCreadie, CEO and Chief Investment Officer at AGF Management Ltd, adds that a bigger calamity can be avoided thanks to the swift response by US regulators. Some other regional banks have now shored up their balance sheets in the wake of the two bank failures.

“…these smaller lenders are in much better position to weather the current storm should it escalate and lead to more bank runs from here,” as per McCreadie.

“Even though SVB had unique features that resulted in this revealed vulnerability, its failure will likely tighten financial conditions and slow lending growth despite government efforts to shore up confidence over the weekend. Banks in general may be well capitalized, but deposit runs are still a risk as banks must compete with money funds with higher yields and access to the Fed’s RRP. As a result, it’s difficult to imagine how banks won’t tighten lending standards and slow loan growth. For economic growth and inflation, it is credit growth that matters for real growth,” says Tiffany Wilding, North American Economist at PIMCO.

While this is the case with the US banks, the fall of the banking giant Credit Suisse is raising concerns of a global contagion.

“Given the scale of Credit Suisse’s balance sheet and operations, the market is worried about the interconnectedness risk for the rest of the sector. We expect the majority of the counterparty exposures to be collateralised hence we do not expect material losses from a potential resolution or wind down,” as per Amundi. “Since the Great Financial Crisis, the sector is well capitalised, highly regulated and in far better shape compared to the previous crisis. It will be important to monitor liquidity and deposit flows for the sector over the coming periods,”

Bank failures and interest rate hikes

In light of the turmoil in the US financial ecosystem, the Federal Reserve is expected to scale down its monetary policy tightening. However, this is a tricky bet as inflation is still high and cutting interest rates aggressively might not be the best course of action.

“The Fed will be reluctant to cut rates while the labour market is so very tight and inflation so high. Cutting rates too early was a mistake they believe they made in past inflation periods,” as per Columbia Threadneedle’s Bell, adding that there is a link between tighter credit conditions and employment in the US.

“I think we are close to the peak in US interest rates and significant declines are likely by year end,” says Bell.

However, Bell adds that the situation with Credit Suisse is different compared to the US, and the Swiss bank’s woes do not appear to be matched elsewhere in European banks.

“Wiping out Credit Suisse’s bonds was a shock and will make it more expensive for banks to raise further capital. Lending standards will tighten further. But falling energy prices are a major source of improving confidence for both consumers and corporates in Europe. Finances of both sectors are strong. The European Central Bank was right to press ahead with a 50 bps rate hike last week,” as per Bell.

Besides Columbia Threadneedle, other asset managers too have taken note of the links between the bank failures in the US and Europe.

Northern Trust Asset Management says that there are no indications that Credit Suisse has direct exposure to Silicon Valley Bank’s issues, but rather it was a bank that was struggling for years. Its perceived weakness was enough to trigger a bank run.

“We believe it’s positive to see policymakers step in decisively to remove such a significant risk, but that doesn’t mean the risk to financial stability has been removed completely. We think restoring stability will take time, and perhaps policymakers need to take even more measures,” as per Northern Trust.

What about investments?

While the stability of the global financial system remains the primary concern, what is the implication for investors?  

“So in the months ahead, market volatility may come and go. And for all of us, I think it’s important to remember to focus on what we can control. It’s that balance and diversification in our portfolio and, most importantly, it’s sticking to our plan, because in sticking to our plan, it increases the odds we will be successful in helping to achieve our long-run goals,” says Vanguard.

Although focusing on long-term goals is one way to look at things, the current market uncertainty and the financial sector woes are likely to spill into various companies across industries.

“My broader concern is that years of low rates and high liquidity have created many “zombie” companies in the US that normally would have gone to the wall by this stage in the cycle. If they do need to raise more funds, it will be expensive, and the most recent surveys show loan terms will be tighter. We may soon see a rise in insolvencies as a result,” writes Steve Ellis, Fidelity International’s Global CIO for Fixed Income.

But all is not glum, as there is light at the end of the tunnel. Manulife Investment Management’s Ryan Lentell is exploring the opportunity set that is presented by the turmoil.

“We also feel that the volatility is creating investment opportunities for an industry that’s generally characterized by well-capitalized companies with limited delinquencies and strong balance sheets. The market action is creating dispersion among select bank stocks, with some seeing additional selling pressure and others seeing stabilization,” writes Lentell, Portfolio Manager, Capital Appreciation, at Manulife Investment Management.

The asset manager adds that the bank failures that we are seeing now are due to their high concentration in industries that were facing significant funding, regulatory, or legal pressures. Lentell says that banking stocks are under pressure but having diversified customer bases reduces their liquidity risk.

“We believe that most banks have assets that have benefited from higher interest rates,” says Lentell.