Watching Financial Strains
After several small bank failures, pressures have recently emerged in the US financial system.
The stresses have appeared because of significant deposit outflow in recent months as US households accessed funds for revenge spending and sought better returns in credit and equity markets. This deposit outflow was fast and exposed poor liquidity management amongst smaller institutions. Some banks have also been caught out by mark-to-market losses on securities held on balance sheets. The Federal Reserve acted decisively by extending deposit guarantees and offering to buy securities at their par value. This helped contain the damage, but given that there are over 4,000 banks in the US and limited regulation at the smaller end, it would not be a surprise if additional problems emerged.
Stepping back, however, there is much less risk in the financial system than in the lead-up to the 2007 financial crisis. US household debt has declined relative to income, and lending quality has steadily improved. Changes to global capital rules mean that capital buffers are much greater than 15 years ago, particularly for smaller US banks where tier 1 ratios average around 22%. Aggregate levels of liquidity across the US system are also healthy, so even though deposits are leaving, there are still plenty of them overall; the average loan-deposit ratio is only 70% compared with around 100% before the crisis.
This makes a systemic crisis far less likely. However, the Fed will be vigilant and watch for evidence of a credit crunch led by banks’ inability to lend. Some tightening in credit standards is expected during a rising rate period, but a significant change in credit availability would have macro consequences.
Nevertheless, further pockets of stress are inevitable after such a fast and sharp change in interest rates. A few sectors look particularly vulnerable and should be monitored closely. One is US commercial property. Regional banks have been major lenders to real estate, and there could be some pressure points if they cannot refinance loans as they fall due. The office sector, in particular, has seen a jump in vacancies due to the switch to hybrid working. Government debt jumped globally during the COVID crisis and remains exceptionally high relative to history. As rates rise, this debt will be harder to service, and several less-wealthy countries will likely be forced into default.
This information was prepared by Evans and Partners Pty Ltd (ABN 85 125 338 785, AFSL 318075) (“Evans and Partners”). Evans and Partners is a wholly owned subsidiary of E&P Financial Group Limited (ABN 54 609 913 457) (E&P Financial Group).
The information may contain general advice or is factual information and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Where a particular financial product has been referred to, you should obtain a copy of the relevant product disclosure statement or offer document before making any decision in relation to the financial product. Past performance is not a reliable indicator of future performance.
The information may contain statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. E&P, its related entities, officers, employees, agents, advisors nor any other person make any representation as to the accuracy or likelihood of fulfilment of the forward-looking statements or any of the assumptions upon which they are based. While the information provided is believed to be accurate E&P takes no responsibility in reliance upon this information.
The Financial Services Guide of Evans and Partners contains important information about the services we offer, how we and our associates are paid, and any potential conflicts of interest that we may have. A copy of the Financial Services Guide can be found at www.evansandpartners.com.au. Please let us know if you would like to receive a hard copy free of charge.
Help me find an SMSF accountant
Begin a conversation with an accountant who can help you with your self-managed super fund.
Help me find an adviser
Begin a conversation with an adviser who will help you achieve your wealth goals.
Subscribe to insights
Subscribe to get Insights and Ideas about trends shaping markets, industries and the economy delivered to your inbox.
Start a conversation
Reach out and start a conversation with one of our experienced team.
Connect to adviser
Begin a conversation with one of our advisers who will help you achieve your wealth goals.
You can search for an adviser by location or name. Alternatively contact us and we will help you find an adviser to realise your goals.