Insights

• March bank stress is not a repeat of 2008, but downside risks remain.
• We discuss the underlying drivers of historically high volatility in interest rate markets.
• The potential path ahead for rates is wide, underscoring the value of defensive, macro neutral strategies.

Bank stress is not GFC 2.0, but downside risks remain

March was eventful in markets. The collapse of SVB, forced merger between Credit Suisse and UBS and pressure on other banks was a major shock for investors. Volatility surged – most notably in interest rate markets and US regional and some European bank assets. Bank failures, forced mergers and emergency liquidity provisions has a 2008 feel about it.

Since the initial shock, investor sentiment has moved towards a “this time is different” view. And with some good reasons, notably:

• Idiosyncratic risks with the business model and capital structure of SVB and other US regional banks.
• The substantial improvement in capital and liquidity positions of large, systemically important banks since 2008.
• The rapid response of policymakers to shoreup confidence – through heavy liquidity provision and assurances to deposit-holders.

Market panic has eased significantly over the last week, but it’s still early days. Markets will remain wary about liquidity and profitability of banks at a time of high short-term rates. Smaller US bank stock prices have taken larger hits in March and there have been large deposit flows from smaller to larger banks and to money market funds where pricing is attractive (Chart 1). Technology has facilitated faster deposit flows than in 2008, as the speed of collapse in SVB shows. Broader funding market stress has been well contained, supported by ample central bank liquidity.