Bank Contagion Spreads to International Markets: Is Another Global Crisis On the Horizon?
It appears that bank contagion has now reached beyond national borders, leading to the apprehension that the dramatic collapses of the American banks Silicon Valley Bank (SVB) and Signature Bank last week may be the beginning of another worldwide financial disaster. On the back of reports indicating ongoing depositor outflows, the shares of Credit Suisse Group – one of Europe's top 20 largest banks by assets – plummeted more than 32% during intraday trading, landing at a new all-time low.
At the same time, the debt load of Americans has dramatically increased. Credit card balances increased by $61 billion to a record high of $986 billion in the last quarter of 2022—a rapid reversal from two years ago when Americans were paying down debt with stimulus checks, according to data from New York Federal Reserve. The amount of auto loan debt increased by $94 billion. Bankrate reports that the amount of credit card holders who have debt from month to month has risen from 39% to 46% in the last year. In a report last month from Cox Automotive, it was noted that auto loan delinquencies have been gradually increasing since their pandemic nadir and the proportion of auto loans more than two months behind on payments is now at its greatest level since 2006.
As anxiety around the future of US banks increases, signs of increased pressure in dollar funding markets have appeared, with lenders looking to bolster their own cash reserves. Prior to its collapse, SVB had attempted to bolster its finances by selling a portfolio of US$21bn worth of Treasury and agency securities, unfortunately resulting in a large loss. The Federal Reserve has declared a new financing plan which allows banks to obtain funds by pledging Treasuries and other securities at their full face value.
Last week, credit investors were highly interested in bank bonds. The bankruptcy of Silicon Valley Bank had a huge impact and buyers are still cautious in spite of the resurgence of financial sector assets on Tuesday. It is my opinion that the bond rally will continue for as long as there are worries of a full-blown banking disaster. If an investor is looking for a way to protect their capital, short-term Treasuries are a good option since they are less volatile than long-term bonds.
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