This Is No 2008

Recent bank failures may be shaking up markets but analysts don’t consider it the same as the global financial crisis of 2008, citing different catalysts and macroeconomic conditions. 

Among other differences, the current stresses resulted from the Federal Reserve’s aggressive interest rate hikes over the past year, analysts said.

While U.S. agencies recently made whole depositors at Silicon Valley Bank — the largest bank to fail since 2008 — and Signature Bank, market strategists see differences from the earlier, widespread industry crisis.

Rate Hike Fallout

BlackRock Investment Institute, similar to other market experts, called recent bank failures “the latest fallout from the most rapid rate hikes since the early 1980s. We have argued that bringing inflation down would be costly, creating economic damage and cracks in the financial system.”

The firm, in commentary Monday, said it expected events this week to crimp bank lending, which reinforces its recession outlook as central banks keep fighting inflation.

“The banking stresses that are roiling markets are very different — but what they have in common is that markets are now scrutinizing bank vulnerabilities through a lens of high interest rates,”  BlackRock wrote. “We don’t see a repeat of the 2008 global financial crisis. Some of the troubles that emerged recently were longstanding and well-known, and banking regulations are much stricter now.

“Instead, this is about a recession foretold. Why? The only way central banks could bring inflation down was to hike rates high enough to cause economic damage. The latest financial cracks are likely to tighten credit, dent confidence — and eventually hurt growth.”

BlackRock is staying underweight equities and has downgraded credit to neutral, has overweighted short-term government bonds and favors emerging market assets, including emerging market stocks and local-currency debt.

Lessons Learned

Bob Doll, chief investment officer at Crossmark Global Investments Inc., said in a note Monday that today’s bank losses aren’t related to economic problems or deteriorating credit and are “quite different” than the 2008 financial crisis.

A deflationary outcome could have happened if policymakers hadn’t intervened and provided a backstop for bank depositors last week, Doll wrote. “Central banks learned the lesson of 2008 by acting quickly and providing open-ended protection to depositors, but not shareholders,” he said, adding that the Fed should issue verbal guidance and regulatory measures to address lingering concerns in the banking sector.

Because investors fear further contagion, financial markets will continue to be volatile and prone to “risk-off” investing until shoes stop dropping, Doll wrote. The free-money era’s rapid end, with the Fed raising its interest rates to 4.5% in 12 months, was bound to cause transitional problems for various asset markets, he said.

If confidence in banking returns, Doll expects the Fed to to hike its benchmark rate to 5% to 5.25% and hold it there through year-end.