The Financial Times: Repercussions of the banking crisis might not be over
The Financial Times said that, the Implications of the Banking Crisis, may not be over yet.
Following the collapse of two US banks, Silicon Valley and Signature, the Financial Times says, it’s still not clear whether more dominoes will fall.
The driver of the crisis, high interest rates, remains a threat, confidence is shaken and vulnerabilities in the banking sector may widen, and this means that the crisis may not be over yet.
The acquisition of Credit Suisse by the Swiss bank, UBS, has its repercussions.
The record of small bank mergers is diversified, and the new giant entity will acquire even greater global significance.
Because the structure of the deal saw holders of convertible bonds wiped out while shareholders received compensation, investors questioned the hierarchy of rights in the event of a bank failure, stocks are usually lower than these bonds.
Interest rate risks loom outside banks as well, highly leveraged sectors and investment funds with interest rate sensitive assets remain exposed.
The risks could be exacerbated with no final victory in the battle against inflation, central banks need to raise interest rates.
Even if more banks aren’t ousted, there is a real risk of widespread credit stress.
Higher interest rates have already reduced lending to the real economy, and banks are likely to raise lending standards further in response to recent events.
According to the Financial Times, mortgage lending appears to be particularly vulnerable.
If credit is tightened significantly, a downward spiral and defaults are possible.
In the US, the bulk of commercial mortgage lending comes through smaller lenders who are now under pressure.
Also, those who need to refinance loans may face challenges.
With mortgage-backed securities held by banks already taking a hit.
However, the Financial Times believes that a crisis of the size of 2008 remains unlikely, as bank capital has become stronger now.
Besides, authorities have also been reassuringly proactive in providing support.