The Crucial Questions

In moments like these when events are rapidly unfolding and investors struggle to keep up with volatile markets, it is important to step back and ask three crucial questions:

  1. Is a systemic financial crisis unfolding?
  2. Will central banks stop hiking rates?
  3. What actions can policymakers take to stabilize banks, financial markets and the economy?

Here are our current thoughts:

A decade of cheap funding and deposit stability had ended. Over the past decade, zero interest rates made for stable bank deposits because nothing offered a more attractive return. Following 4.75 percentage points of US Federal Reserve (Fed) rate hikes that began 12 months ago, deposit holders have choices, such as money market funds that offer more compelling returns and are nearly as liquid.

Rising rates pose challenges to the asset side of banks’ balance sheets. That became plainly evident at Silicon Valley Bank (SVB), where losses on unhedged bond holdings blew a hole in the bank’s earnings, leading to its collapse. Other banks may have managed interest-rate risk better, but given the opacity of their holdings, their hedging strategies and their reporting, this lack of transparency is unsettling.