The CEO of Blackrock, the world’s largest asset manager, has warned about additional bank seizures and shutdowns that could result from regulatory changes in response to the failures of several major banks in the U.S. “It does seem inevitable that some banks will now need to pull back on lending to shore up their balance sheets, and we’re likely to see stricter capital standards for banks,” he added.
Larry Fink, the chairman and CEO of Blackrock, the world’s largest asset manager, shared his view on the U.S. economy and recent bank failures in his annual chairman’s letter to investors, published this week.
“This past week we saw the biggest bank failure in more than 15 years as federal regulators seized Silicon Valley Bank. This is a classic asset-liability mismatch. Two smaller banks failed in the past week as well,” Fink described. Silicon Valley Bank was shut down by regulators on March 10 while Signature Bank was seized by the New York State Department of Financial Services last Friday. Silvergate Bank also recently announced voluntary liquidation, and 11 banks bailed out First Republic Bank this week. In Switzerland, Credit Suisse also fell into trouble and received a bailout from the Swiss central bank.
“It’s too early to know how widespread the damage is. The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge. Will asset-liability mismatches be the second domino to fall?” the Blackrock executive wrote, adding:
We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S&L crisis [savings and loan crisis]) with more seizures and shutdowns coming.
“It does seem inevitable that some banks will now need to pull back on lending to shore up their balance sheets, and we’re likely to see stricter capital standards for banks,” he continued.
“Over the longer term, today’s banking crisis will place greater importance on the role of capital markets. As banks potentially become more constrained in their lending, or as their clients awaken to these asset-liability mismatches, I anticipate they will likely turn in greater numbers to the capital markets for financing,” Fink explained.
The Blackrock executive further warned: “In addition to duration mismatches, we may now also see liquidity mismatches. Years of lower rates had the effect of driving some asset owners to increase their commitments to illiquid investments — trading lower liquidity for higher returns. There’s a risk now of a liquidity mismatch for these asset owners, especially those with leveraged portfolios.” Fink detailed:
As inflation remains elevated, the Federal Reserve will stay focused on fighting inflation and continue to raise rates. While the financial system is clearly stronger than it was in 2008, the monetary and fiscal tools available to policymakers and regulators to address the current crisis are limited, especially with a divided government in the United States.
“With higher interest rates, governments can’t sustain recent levels of fiscal spending and the deficits of previous decades,” he additionally cautioned. “The U.S. government spent a record $213 billion on interest payments on its debt in the fourth quarter of 2022, up $63 billion from a year earlier.”
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