Analysis | What impact will these failing banks have on us?

Silicon Valley Bank lost its footing in record time.

The shattering bankruptcies of three regional banks in the United States, to which must be added the problems at Credit Suisse, are scaring investors and plunging us all into the unknown. What is the impact on the ordinary citizen, on the financial markets or even on interest rates? Will the recession hypothesis be confirmed?

One ​​thing is certain: the global economy is under stress and it will remain so throughout 2023 We must therefore expect volatility on the markets, an increasingly probable recession, but also an easing in interest rates… Only, we will have to be patient.

First things first: what's going on with the banks? With the rapid rise in interest rates orchestrated by central banks, the bond portfolio of banking institutions has lost enormous value. When information gets out, it can create panic. This is what happened at Silicon Valley Bank where customers did everything to get their money out quickly.

As for Credit Suisse, we are in the midst of restructuring in order to return to profitability. Its largest shareholder, the Saudi National Bank, however refuses to again extend the liquidity necessary to relieve the Swiss banking institution. Result: investors fear for its survival and the stock fell 30%, sending major indexes in Europe and North America plummeting.

Many now fear an effect domino over other banks weakened by the economic situation.

This hodgepodge of bad news comes as the European Central Bank is due to make an interest rate decision on Wednesday. The US Federal Reserve (Fed) must also decide on its key rate next week in an attempt to curb inflation, which remains high in the United States.

In the current context, what to expect in the coming weeks?

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Volatility on global stock markets may be here for a long time, believes Sébastien McMahon, chief economist at Industrial Alliance .

Yes, we can expect a volatile year, but how big? No one knows, he believes.

Everything will depend on the next few weeks, he said. Will mistrust settle in towards the banks? Will other financial institutions prove fragile with rising interest rates?

Or, continues Sébastien McMahon, will the actions of regulatory authorities be sufficient to contain all of this and that, in a few weeks, we will be looking at all of this to think that we were panicking a little in the middle of March? History shows that it is safe to be safe. But we'll find out soon enough.

But if people think that European banks have weaknesses, then there, we have just increased the potential stress. […] We are talking about people's deposits, Mr. McMahon points out, panic can set in quickly: it is a question of emotion and perception.

That said , and the pundits keep saying it, stock markets could falter, but Canadian banks are much more regulated and sounder than many U.S. banks.

The Canadian banking system is much better capitalized, the banks are much better diversified across the country, across sectors, unlike Silicon Valley Bank which is in California and oriented towards high tech, recalled the economist Clément Gignac during an interview with Gérald Fillion this week.

In addition, all Canadian banks, unlike small American banks, are subject to stress tests, stress tests, he points out. Tests that allow you to see, for example, how your portfolio reacts to a rise in interest rates as we currently see.

A trader on the floor of the New York Stock Exchange.

With the fall of regional banks in the US, one thing is certain: this type of institution will come under increased scrutiny from regulators and there will likely be a credit crunch resulting in a slowing economy. /p>

The rules of the game will tighten for the regional banks, we will be more severe, continues Clément Gignac, in an interview with Radio-Canada. In my view, this tightening will accelerate the recession here. Access to venture capital will also be limited.

This means that with less access to capital and high interest rates, companies will invest less and layoffs could occur during 2023, pushing Western economies into a deeper recession.< /p>

I estimated at 60%, 65% the chances of having a recession before Thursday, before the failure of the regional banks. There, he says, those odds are now at 85%. We will also have a more visible recession, accompanied by layoffs. Job offers will decrease.

But, according to him, there is not yet a scenario of a recession like in 2008-2009 or like that of the early 1980, when the unemployment rate had risen significantly.

Will it be a recession like in 1990 with an unemployment rate that had risen by 2%? Yes, it could be like that. The credit crunch looks like a hike from 75 to 100 basis points, which does not materialize on screen, but materializes in reality, because the bank will question its customers more, believes it.

Same story with Sébastien McMahon, who believes that the probability of a recession is now greater.

With everything that is happening there, if it is the banks that slow down credit, that lend less… The economy is very much a question of confidence for households and businesses, he recalls. So, yes, we must increase the probability of a recession in 2023 and we must expect the recession to be worse than we thought.

All this highly fragile and unpredictable context cause central banks to lower interest rates more quickly? On this, we will still have to be patient, say the experts.

Inflation numbers are not good in the United States. We're still over 5%. I would be surprised if there were no rate hikes in the United States. Probably a 25 basis point hike, says Mr. Gignac.

But, according to him, the Federal Reserve is in an end-of-rate hike scenario.

< p class="e-p">Don't celebrate too quickly. But yes, for those who have to renew mortgages, this is good news. But to hope for rate cuts, you will unfortunately have to have a recession, he thinks.

For Sébastien McMahon, central banks find themselves caught between a rock and a hard place.

How we juggle a more fragile financial system on one side and on the other with the fight against inflation? It would send a funny message to make a 50 basis point hike, it could be badly perceived.

In Canada, the Bank of Canada has taken a break and will not raise its policy rate if inflation remains under control. Despite everything, we can already see rate cuts in banking institutions. But everything remains fragile.

Five-year interest rates have fallen in recent days in Canada. Yes, it is good for short-term rates. But you have to be careful. We have to be careful because if ever panic strikes, we can see scenarios where interest rates would be on the rise, he notes.