The CEO of Blackrock, the world’s largest investment manager, has warned about additional bank seizures and shutdowns that could result from regulatory changes in response to the failures of plenty of major banks in the United States “It does seem inevitable that some banks will now must pull back on lending to shore up their balance sheets, and we’re likely to see stricter financial resources standards for banks,” he added.
Blackrock’s Chief on More Bank Seizures, Shutdowns
Larry Fink, the chairman and CEO of Blackrock, the world’s largest investment manager, shared his view on the United States economy and recent bank failures in his annual chairman’s letter to investors, published this week.
“This last week we saw the largest bank failure in greater than 15 years as federal regulatory authorities confiscated Silicon Valley Bank. This is a classic asset-liability mismatch. 2 smaller banks failed in the last week as well,” Fink stated. Silicon Valley Bank was shut down by regulatory authorities on March 10 while Signature Bank was confiscated by the New York State Department of Financial Services last Friday. Silvergate Bank likewise recently announced voluntary liquidation, and 11 banks bailed out 1st Republic Bank this coming week. In Switzerland, Credit Suisse likewise dropped into trouble and received a bailout from the Swiss central bank.
“It’s as well early to know how widespread the damage is. The regulatory response has so far been swift, and decisive actions have helped stave off contagion dangers. On the other hand, markets remain on edge. Will asset-liability mismatches be the Second domino to fall?” the Blackrock executive wrote, adding:
We do not know is still whether the consequences of easy money and regulatory changes will cascade throughout the United States regional banking sector (akin to the S&L crisis [savings and loan crisis]) with more seizures and shutdowns coming.
“It does seem inevitable that some banks will now must pull back on lending to shore up their balance sheets, and we’re likely to see stricter financial resources standards for banks,” he continued.
“Over the longer term, today’s banking crisis will place greater importance on the role of financial resources markets. As banks potentially become more constrained in their lending, or as their clients awaken to these asset-liability mismatches, I anticipate they will likely turn in greater numbers to the financial resources markets for financing,” Fink explained.
The Blackrock executive further warned: “ Along with duration mismatches, we may now likewise see liquidity mismatches. Years of lower prices had the effect of driving some investment owners to increase their commitments to illiquid assets — trading lower liquidity for higher returns. There is a danger now of a liquidity mismatch for these investment owners, especially those with leveraged portfolios.” Fink detailed:
As inflation remains elevated, the Federal Reserve will stay focused on fighting inflation and continue to raise prices. Although while the financial system is clearly stronger than it was in 2008, the monetary and fiscal tools available to policymakers and regulatory authorities to address the present crisis are limited, especially with a divided Government in the United States.
“With higher interest prices, governments can’t sustain recent levels of fiscal spending and the deficits of previous decades,” he in addition cautioned. “The United States Government spent a record $213 Billion on interest payments on its debt in the fourth quarter of 2022, up $63 Billion from a year earlier.”