Market Insights
March 2023

Many bad things can happen to banks. Its customers can pull their money out (a liquidity crisis). Their borrowers can fail to repay their loans (a solvency crisis). Their shareholders can sell their stock, sending their shares down (a confidence crisis, making it far harder for them to raise money). And beyond true crises, changes in economic and financial conditions can attack their profits — which is bad for shareholders and ultimately might tend to imperil everyone connected to the bank. All of these things are conceptually separate, although in practice they will often affect each other.
The collapse of Silicon Valley Bank, Signature Bank and Silvergate Capital Corp were all triggered by a liquidity crisis caused by poor diversification of its depositors and lamentable risk management. Those banks are important for the US economy as they feed many young companies with the capital needed to realize their projects. The network between small and/or new companies with their regional banks has a crucial role for the ongoing economic heartbeat of United States. Germany has a similar setting – small industries, famously known as Mittelstand, are connected with their local regional banks, Both models relied heavily on the regional banks albeit with completely different client profiles. The success lies in the proximity with the clients, Know Your Client, in the traditional manner and the quick and smooth response to credit access. We could argue what makes an Economy successful? I will argue it is Energy and Banking services!

Economy is the transformation of energy with the cheapest resources!

The move from bank accounts to money funds and other instruments is likely to put more cash in the pockets of longsuffering savers, but there is concern that a dearth of deposits will leave the US with a smaller number of community and regional banks that have less money to lend — and that in turn could hold back growth and worsen inequality. Bank loans are a crucial source of funding for small businesses, which employ about 46% of Americans who work in the private sector and have generated nearly two-thirds of jobs created since 1995, according to the US Small Business Administration.
The forthcoming regulations and commercial real estate mayhem will, for sure, dampen small and midsize activities damaging the economic activities.as they will deprive firms of capital. Since 2022 the cost of money has already made its way through the credit activities, whether loan, leasing, or short-term credit lines. The inverted yield curve does not provide high incentive for banks to offer for long-term credit and now with the mistrust and new regulations the credit will be restrained. 

Small and Mid-cap companies will be the first in line to suffer. Credit spread widening will accelerate, in the first instance, for lower quality bonds – CCC bond spread is already under pain and it will soon contaminate the other ratings! Stay away long duration High yield bonds, stay away small/mid cap companies with weak balance sheets.