Banking Crisis Continues: Man Group CEO Warns of More Bank Failures in 2 Years.

Banking Crisis Continues: Man Group CEO Warns of More Bank Failures in 2 Years.

Following the unexpected takeover of Silicon Valley Bank by regulators on March 10, the federal government issued assurances that all depositors, insured and uninsured alike, would receive their money. But, despite that assurance, the banking industry’s unrest has only worsened, leading to a historic seizure of a “too big to fail” bank and an emergency cash infusion at another local institution.

The turmoil is bringing to mind the global financial crisis of 2008, which started the Great Recession, cost 8 million jobs, and created a housing catastrophe. Questions about whether the current banking issues could expand and endanger the US economy and individual consumers’ bank deposits are being raised in light of the harsh lessons learned from that chapter.

According to Luke Ellis, CEO of hedge fund Man Group, the banking upheaval brought on by Silicon Valley Bank’s failure is still ongoing, and many banks will fall within the next two years. Ellis made this statement on Wednesday at a Bloomberg conference in London.

Ellis informed attendees at the event that he did not believe the industry’s issue was over when asked if it was. The weekend’s emergency rescue of Credit Suisse by its Swiss rival UBS was necessitated by market volatility, and the action has helped to calm the markets.

I think there will be many more banks that don’t exist in the next 12 to 24 months,” he predicted, adding that challenger banks in Britain and smaller regional banks in the United States would be in danger.

According to Ellis, social media and other forms of technology have sped up the rate at which rumours about banks can spread. “Things move much more quickly now. Whether that’s good news or a crisis, he said. Ellis said he has no holdings in US regional banks, but many hedge funds have profited from the recent volatility in the banking sector by betting against banks.

Could there be more bank failures?

In line with a recent study conducted by scientists from Stanford, Columbia, Northwestern, and the University of Southern California.

If a bank has a large percentage of uninsured deposits, that could be a problem because depositors with more than the $250,000 FDIC insurance limit risk losing that money if the bank fails. This could increase the likelihood of a bank run, which could result in the collapse of banks with a high percentage of uninsured deposits.

Bank failures are uncommon, but they are severe and contagious when they do occur. A recent analysis found that over 190 different banks in the United States are in danger of failing due to the domino-like collapse of Silicon Valley Bank and Signature Bank.

The failure of SVB and Signature, two mid-sized regional banks that were well-liked by startups and venture capitalists, was primarily attributed to the Federal Reserve’s interest rate hikes. Both banks suffered from a high percentage of uninsured deposits and significant losses on bond investments.

Several other banks also check these two boxes. According to research published in the internet journal Social Science Research Network on March 13, 186 banks could fail if more than half of their depositors rushed to withdraw their money.

Researchers from Stanford University, Columbia University, Northwestern University, and the University of Southern California examined a sample of US banks’ asset exposure to interest rates and the number of uninsured deposits they hold in their article, which was published at these institutions.

The Federal Deposit Insurance Corporation will protect your money up to a maximum of $250,000. Any sum above that will result in a loss for depositors if a bank runs out of funds.

According to the survey, almost all US banks have more insured deposits than SVB or Signature. Nonetheless, many banks are more susceptible to losses on investments. According to the survey, SVB and Signature had smaller unrecognised investment losses than about 10% of the banks examined.

Rising interest rates are eroding bank assets.

Bond holdings, which are typically seen as low-risk investments in normal times, have seen their value decline due to a year of sharp increases in interest rates. According to the survey, US banks have lost an average of 10% of their bond holdings over the past year. A bank run is encouraged by this, along with uninsured deposits.

“Over 190 institutions are at a potential risk of impairment to insured depositors, with approximately $300 billion of insured deposits at risk,” the survey stated. “Even if only half of the uninsured depositors elect to withdraw.” “Many more banks are in danger if even minor fire sales result from uninsured deposit withdrawals.”

But if the government does nothing, this future is inevitable. In reality, every failing bank in modern memory has been bailed out by the government or a larger organisation. The FDIC assumed control of SVB and Signature, and depositors were guaranteed full compensation.

Over the weekend, UBS acquired Credit Suisse at a significant discount. Moreover, First Republic, the most recent regional bank to experience a deposit run last week, received a $30 billion liquidity injection from a collection of sizable banks to avoid suffering the same fate as SVB.

After a week of severe selling, banking stocks are showing signs of stability. Today (March 20), the Dow Jones U.S. Banks Index increased 1.6 per cent after declining by roughly 10 per cent the previous week. Yet, First Republic’s stock is still falling, down 26% today.

How does this relate to the issues with Credit Suisse?

Many of Credit Suisse’s issues were distinct from and unlike the flaws that led to the failure of Silicon Valley Bank and Signature Bank in the United States, including exorbitant interest rates.

Many issues have plagued Credit Suisse in recent years, including failed hedge fund bets, several changes to its top management, and a spying incident involving competitor UBS, which announced that it would acquire Credit Suisse on Sunday.

According to analysts and financial authorities, security measures have been strengthened since the global financial crisis of 2008, and banks worldwide have plenty of cash on hand and assistance from central banks. Yet, worries over deal risks, losses for some investors, and Credit Suisse’s declining market value might rekindle concerns over the stability of banks.

The Banking Sector’s Future in 2023 After the SVB Crisis.

Recent years have seen a lot of pressure on the banking industry due to things like low-interest rates, more regulatory scrutiny, and the rising threat of cyberattacks.
The banking industry is already struggling in light of the ongoing COVID-19 pandemic, the expansion of remote work arrangements, and the current status of the economy.

The Bank of England is still confident in the soundness of the financial system in the United Kingdom, and central banks worldwide are cooperating to guarantee the movement of money between institutions. To mitigate potential risks, investors should exercise caution and diversify their holdings across various asset sectors.

Man Group is a multinational asset management and hedge fund firm. Since its founding as a sugar cooperage and brokerage company in London in 1783, it has developed into a top alternative investment management company.

The Man Group manages numerous asset classes, including equities, fixed income, commodities, and alternative investments, using various investment methods. More than 1,400 people work for the company internationally, which has operations in more than 15 nations.

Edited by Prakriti Arora