Will Credit Suisse and SVB spark a new banking crisis?
Financial experts are calling for calm, reminding investors why it won't be the second coming of the GFC.
In the space of a week, we've had two separate banking incidents which have spooked investors.
Firstly, Silicon Valley Bank, which is the go-to bank for tech startups, suddenly collapsed.
Fast forward a few days, Swiss global investment bank, Credit Suisse, came out saying it had "material weakness" in its balance sheets.
In both cases regulators came to the rescue.
While in the case of Credit Suisse, it was bought out by its rival UBS for around a third of its previous value.
This has experts split on what it will mean for the banking system.
Not a repeat of the GFC
When investors saw a few banks fail, it's little wonder that the first thought is a repeat of the Global Financial Crisis (GFC).
The market as a whole was quick to dump banking stocks, as investors feared the worse.
However, Morningstar's US market analyst Dave Sekera doesn't believe this is a repeat of 2008.
"Except for the rapidity as to how fast these stock prices have fallen, the current situation is much different from what prompted the 2008 global financial crisis," he wrote.
Instead, he points out that there's not a whole freeze in liquidity across the sector like there was in 2008.
Meanwhile Blossom's investment manager Christian Baylis says sentiment will remain key when it comes to the banking system.
"We don't believe this is the beginning of another crisis like the GFC. In fact, it is a different issue altogether. Banks are better placed today than they were back in 2008, but that said, it is all about how people respond to a crisis and this can be difficult to predict," Baylis explains.
'As bad as it gets'
While some experts think this current banking crisis won't be as bad as the GFC, others disagree.
According to ACY Securities chief economist Clifford Bennett, "this is as bad as it gets."
He points out that it will even have larger implications for the bond markets.
"A full banking crisis has suddenly rushed across the horizon toward us.
"Not only was Credit Suisse revalued over the weekend at half its Friday market close, such valuation required the zeroing of many bondholders' stakes and massive government guarantees on losses UBS might suffer as a result of this purchase of Credit Suisse," he said in a note published Monday.
Meanwhile Capital Economics chief economist Neil Shearing says it's too early to tell what will happen next.
"In principle a complete takeover of Credit Suisse may be the best way to end doubts about its viability. However the devil will be in the details of the UBS agreement, not all of which are clear at the time of writing," he says.
But he does point out that the banking system at large remains well capitalised, which could offset some of the dramas.
What can you do?
At the end of the day, nobody can know for certain what the future holds.
Regardless though you can still do a few things to mitigate your situation if you're preparing your finances for a recession.
These include:
- Focus on paying down debt
- Build up emergency savings
- Create a budget to reduce spendings
- Continue to buy shares (in quality assets you think have a long-term future)
- Stay informed but ignore the hype.
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