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Banking crisis could prove ‘good for markets’

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The banking crisis that spooked investors and sent shockwaves around the world could ultimately be beneficial for financial markets, the CEO and founder of a leading financial advisory and fintech said on Monday after the biggest rescue in Swiss banking history.

UBS agreed to buy the embattled Credit Suisse for $3.2 bln on Sunday, with the Swiss National Bank also pledging a loan of up to $108 bln to back-up the takeover.  

It came just days after the second and third biggest bank failures, Silicon Valley Bank and Signature respectively, in US history in recent days.

“The events of the past week or so have sent markets reeling as investors feared a credit crunch, and other issues, last seen during the 2008 financial crisis,” said deVere Group’s Nigel Green.

“Despite the shockwaves, we expect that the banking crisis could ultimately prove to be beneficial for markets for several reasons,” he said.

The deVere boss explained that the emergency lifelines being thrown to banks by regulators and governments, among others, appear to have now halted contagion within the sector, largely containing the crisis from hitting other firms and other sectors.

“Investors’ nerves will be calmed after the US Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank in a coordinated statement, which came ahead of the opening of financial markets in Asia on Monday, all vowed to boost liquidity to ease pressures in the international financial system.

“It underscores the commitment to do whatever it takes to avert another wholesale crash. This brings the confidence and certainty that markets crave,” Green said.

Withstand shocks

A harsh spotlight has been focused on banks in the last week and while it has been for many of the wrong reasons, it has also “served to highlight to investors that the rules imposed in the wake of the 2008 financial crisis mean that most banks are in a strong position to withstand shocks,” he said.

Green added that most financial institutions have plenty of capital and more than enough liquidity to meet operational needs and withdrawals – and that what went wrong at Credit Suisse and SVB were decisions made by a handful of former senior execs.

The deVere CEO said that the crunch in the banking sector and so-far avoided fallout for the wider global financial system strengthens the case that central banks will “ease up on interest rate hikes.”

He noted that central banks know that besides having to try and tame stubbornly high inflation, they also need to ensure financial stability. 

“The events of the last week which rocked confidence will certainly give them cause for pause.

“The stepping back from interest rate hikes will be welcomed by investors who are concerned that overtightening now – when monetary policy time lags are notoriously long – could steer the economy into a recession.”

Both the Federal Reserve and the Bank of England meet this week.

The deVere CEO concluded that it’s been a bumpy ride over the past few days, “but successful contagion containment, the solid fundamentals of most banks, central banks rushing to inject liquidity, and the growing case for interest rate hikes to be paused will be cheered by global markets.”