Blackrock CEO Larry Fink, who runs the world’s largest money manager, warned that the Silicon Valley Bank collapse may not be the last, “with more seizures and shutdowns” possible among regional banks.
Regional banks remain at risk of a “flameout” like the savings and loan crisis of the 1980s and early 1990s, when more than 1,000 institutions failed, Fink wrote in an annual letter to investors.
Whether the crisis brought on in part by rising interest rates will hit more banks remains unclear, said Fink, referencing the failures of Signature Bank and Silvergate.
“It’s too early to know how widespread the damage is. The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks,” he wrote. “But markets remain on edge.”
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Aggressive fiscal and monetary policy since the 2008 financial crisis has contributed to high levels of inflation not seen since the 1980s.
“To fight this inflation, the Federal Reserve in the past year has raised rates nearly 500 basis points. This is one price we’re already paying for years of easy money – and was the first domino to drop,” Fink said.
Silicon Valley Bank was the second. The third domino that may tumble is “liquidity mismatches,” according to Fink.
“Years of lower rates had the effect of driving some asset owners to increase their commitments to illiquid investments – trading lower liquidity for higher returns,” he said. “There’s a risk now of a liquidity mismatch for these asset owners, especially those with leveraged portfolios.”
With bond markets down 15% last year, something had to give, according to Fink, “as the fastest pace of rate hikes since the 1980s exposed cracks in the financial system.”
Fink predicted banks will pull back on lending and he expects stricter capital standards because of Silicon Valley Bank’s collapse.