The CEO of BlackRock, the world’s largest asset manager, warned that regulatory changes following the collapse of several large U.S. banks could lead to further bank foreclosures and shutdowns. He said, “It seems inevitable that some banks will need to cut back on lending to shore up their balance sheets, and capital standards for banks will become more stringent.”
BlackRock Chief on More Bank Foreclosures and Shutdowns
Larry Fink, chairman and CEO of BlackRock, the world’s largest asset manager, shared his views on the U.S. economy and the recent bank failures in his annual chairman’s letter to investors released this week.
“Last week, federal regulators seized Silicon Valley Bank and we witnessed the first major bank failure in over 15 years. This is a classic asset-liability mismatch. In the past week, two smaller banks have also failed,” Fink explained. Silicon Valley Bank was shut down by regulators on the 10th, and Signature Bank was seized by the New York State Department of Financial Services last Friday. Silvergate Bank also recently announced a voluntary liquidation, and 11 banks have bailed out First Republic Bank this week. In Switzerland, Credit Suisse also ran into trouble and was bailed out by the Swiss Central Bank.
“It is too early to know how widespread the damage is. Regulators have so far acted quickly and decisively to contain the risk of contagion. However, markets remain strained. Will the asset/liability mismatch become a second domino to fall?” wrote a BlackRock executive, adding.
It remains to be seen if the consequences of monetary easing and regulatory changes will cascade throughout the U.S. local banking sector (similar to the S&L crisis (savings and loan crisis)), resulting in further foreclosures and closures.
“It seems inevitable that some banks will need to cut back on lending to shore up their balance sheets, and we can expect more stringent capital standards for banks,” he continued.
“In the long run, today’s banking crisis will make the role of capital markets more important. As banks become more likely to be restricted in their lending or as customers wake up to the mismatch between assets and liabilities, more people will turn to the capital markets for funding,” Fink explained.
The BlackRock executive further warned.
“In addition to duration mismatches, there could be liquidity mismatches. Several years of declining interest rates have caused some asset owners to increase their commitments to less liquid investments, trading lower liquidity for higher returns. These asset owners, especially those with highly leveraged portfolios, are now at risk of liquidity mismatches,” Fink elaborates.
With inflation remaining high, the Federal Reserve will continue to focus on fighting inflation and will continue to raise interest 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 in the United States, where the government is divided.
“If interest rates rise, the government will not be able to sustain recent levels of fiscal spending or the deficits of the past several decades,” he added, “and the government cannot afford to do so.” The U.S. government spent a record $213 billion on debt interest payments in the fourth quarter of 2022, up $63 billion from the same period last year.”
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