Larry Fink is the most powerful man on the stock market. He is the co-founder and CEO of BlackRock, the world’s largest fund management firm with assets close to $10 trillion. Every time he opens his mouth, the world listens. On Wednesday, Fink published his annual letter addressed to the firm’s investors, which includes a chapter on the U.S. banking crisis triggered by the collapse of Silicon Valley Bank. And his message was “we don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the savings and loans crisis) with more seizures and shutdowns coming.”
Fink states that since the 2008 financial crisis, markets have been conditioned by “extraordinarily aggressive fiscal and monetary policies.” As a result of this, he says, inflation has risen to levels not seen since the 1980s. “To fight this inflation, the Federal Reserve in the past year has raised rates nearly 500 basis points. This is one price we’re already paying for years of easy money – and was the first domino to drop,” he explained.
He continued: “Bond markets were down 15% last year, but it still seemed, as they say in those old Western movies, ‘quiet, too quiet.’ Something else had to give as the fastest pace of rate hikes since the 1980s exposed cracks in the financial system.”
Following the banking crisis sparked by the collapse of Silicon Valley Bank, Fink believes that “some banks will now need to pull back on lending to shore up their balance sheets, and we’re likely to see stricter capital standards for banks.” When it comes to the long-term aftermath of the crisis, the founder of BlackRock believes that it will have a special impact on the role of financial 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 capital markets for financing,” he stated. But Fink does not stop there, arguing: “I imagine many corporate treasurers are thinking today about having their bank deposits swept nightly to reduce even overnight counterparty risk.”
In his letter, Fink says there could yet be a third domino to fall. “We may now also see liquidity mismatches. Years of lower rates had the effect of driving some asset owners to increase their commitments to illiquid investments – trading lower liquidity for higher returns. There’s a risk now of a liquidity mismatch for these asset owners, especially those with leveraged portfolios.”
Given inflation is still high, Fink argues that the Federal Reserve will continue to focus on bringing down prices and continue to raise interest rates. “While the financial system is clearly stronger than it was in 2008, the monetary and fiscal tools available to policymakers and regulators to address the current crisis are limited, especially with a divided government in the United States,” he concludes.
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