Blackrock CEO warns more bank seizures and closures could result from regulatory changes – Economics
The CEO of Blackrock, the world’s largest wealth manager, has warned of more bank foreclosures and closures that could result from regulatory changes in response to the bankruptcies of several major US banks. “It seems inevitable that some banks will now have to pull back lending to shore up their balance sheets and we will likely see tighter capital standards for banks,” he added.
Blackrock’s Chief on more bank seizures and closures
Larry Fink, the chairman and CEO of Blackrock, the world’s largest wealth manager, shared his views on the US economy and recent bank failures in his annual chairman’s letter to investors released this week.
“Last week we witnessed the largest bank failure in more than 15 years when federal regulators seized Silicon Valley Bank. This is a classic asset-liability mismatch. Two smaller banks also failed in the past week,” described Fink. Silicon Valley Bank was shut down by regulators on March 10, while Signature Bank was seized by the New York State Department of Financial Services last Friday. Silvergate Bank also recently announced voluntary liquidation and 11 banks bailed out First Republic Bank this week. Credit Suisse also got into trouble in Switzerland and received a rescue package from the Swiss central bank.
“It’s too early to know how widespread the damage is. The regulatory response has been swift so far, and decisive action has helped stave off risks of contagion. But the markets remain nervous. Will asset-liability mismatches be the second domino to fall?” the Blackrock exec wrote, adding:
We do not yet know whether the consequences of easy money and regulatory changes will spread to the US regional banking sector (similar to the S&L crisis). [savings and loan crisis]) come with more seizures and shutdowns.
“It seems inevitable that some banks will now have to scale back lending to shore up their balance sheets and we will likely see tighter capital standards for banks,” he continued.
“In the longer term, today’s banking crisis will place greater importance on the role of capital markets. As banks may become more constrained in their lending or their customers realize these asset-liability mismatches, I expect they are likely to turn to the capital markets for funding in greater numbers,” said Fink.
Blackrock’s board went on to warn: “In addition to duration mismatches, we could now also see liquidity mismatches. Years of lower interest rates caused some asset owners to increase their commitments in illiquid assets, trading lower liquidity for higher yields. These asset owners are now at risk of a liquidity mismatch, particularly those with leveraged portfolios.” Fink elaborates:
Since the inflation stays high, the Federal Reserve will continue to focus on fighting inflation and continue raising interest rates. While the financial system is significantly stronger than it was in 2008, the monetary and fiscal tools available to policymakers and regulators to deal with the current crisis are limited, especially given a divided government in the United States.
“Higher interest rates will not allow governments to sustain recent fiscal spending and deficits of past decades,” he added. “The US government spent a record $213 billion on interest payments on its debt in the fourth quarter of 2022, up $63 billion from a year earlier.”
What do you think of Blackrock CEO Larry Fink’s economic perspective? Let us know in the comment section below.
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