Barbara Burtin is an equity portfolio manager and research director at Capital Group. She also covers European and Latin American banks as an equity analyst. We asked her about the turmoil disrupting the global banking sector, and the outlook for global trade.
When we think about how contagion spreads, confidence is critical. The failure of Silicon Valley Bank and Signature Bank prompted people to turn their attention to other banks, to consider exposures and unrealized losses on securities. It can be hard to predict what might give depositors pause.
In previous periods, mortgage-backed securities and sovereign exposure have triggered bank flight.
Another factor today: News spreads much faster now, with social media. This situation has developed very quickly. In the past, it would have taken several days for people to hear about a potential issue at a bank. Today, they can know immediately.
Take Credit Suisse, which had to be rescued after a rush of withdrawals. Daily withdrawals were massive, reaching 10 billion Swiss francs ($10.9 billion). The bank had already lost a significant share of its deposits and stock value in 2022. There were already questions, so a falling share can amplify and reinforce a crisis of confidence. We saw it with Silicon Valley Bank. Perception is critical.
It’s still early, but lending standards will likely tighten and bank funding costs will probably be higher. Together, those would lower bank profitability. We’ll have to see what regulators take away from this crisis. We’re always fighting the last crisis, in a way. Regulation is always one step behind. I think the U.S. regulatory environment will probably move toward the European one, but we could also see some tighter standards in Europe.
I expect tougher rules on liquidity buffers as well, and potentially on mark-to-market securities.
If we step back, in the past year we’ve been in a liquidity tightening mode. And when there is less liquidity, you have to be very careful about the amount of leverage that companies you invest in have. It’s an environment in which you want to own companies with stronger balance sheets.
In general, there is also less funding. The cost of capital increased quite a lot. It’s more difficult to be a company that doesn’t make money, and valuations have consequently come down. I think the factors that contributed to Silicon Valley Bank’s collapse will also pose issues for the tech industry.
I think interest rates will go up less quickly and that rate cuts will happen earlier. The Federal Reserve slowed its pace of increases in March, going up a quarter point instead of half a point. But I doubt any central bank will return to negative interest rates, which was the environment for a very long time. It made it very difficult for the banks to make money.
There is a term, “reglobalization.” While we are moving toward a world that is more regionalized and fragmented, I think it’s going to be impossible to completely deglobalize. One example: If you want to produce a car, you’ll consider moving some production to places that are friendlier and closer to home. This dynamic extends beyond manufacturing: In the past 15 years, the global banking system has deglobalized and become fragmented and much more local, much more regional.
Mexico is one area that is benefiting from this trend. More industry, more factories and more assembly lines will move there. It’s close to the U.S., with which it has a trade agreement. A lot of companies have a footprint there already. And it’s a low-cost producer with a young population. Factories are opening in other places, too, like India and Vietnam. Many industries are trying to move away from China, but that process will take a long time, maybe a decade or longer.
Europe and the U.S. have become more important sources of production. However, I don’t see a way for everything to be produced in those regions. It would be impossible to find all the necessary labor; at the very least, it would be very expensive.
I anticipate that many businesses will multiply their centers of production. That makes supply chains more secure, but it also makes them more complex. More complexity means more expenses. That give-and-take is part of why I don’t think we’ll completely deglobalize.