AXA IM warns: “Rates can hardly rise without triggering pain”

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The trickle of expert statements continues on this black Monday for the markets -Ibex 35, CAC 40, DAX…- after the stock market crash caused by the fall of SVB Financial Group (NASDAQ:SIVB).

Gilles Moëc, Chief Economist at fund manager AXA (EPA):AXAF) Investment Managers, analyzes the disappearance of Silicon Valley Bank and its direct consequences for the Fed, as well as for the financial system and the technology sector. “SVB’s misadventure helps shed light on the not-so-direct relationship between the level of interest rates and the health of banks. Yes, in general – and in the medium term – the Raising interest rates It benefits banks as it allows them to improve their margins, but profitability can be hurt if variable-rate liabilities collide with long-term fixed-rate assets accumulated at a low level of interest rates.” Gilles Moëc believes that “this is another reason to be very attentive to macrofinancial developments. Even if we are not in systemic territory, we are slowly relearning that interest rates can hardly rise without triggering pain, and although idiosyncratic, the events of the SVB should remind us that macrofinancial channels should be the first to be reviewed – they are likely to be the harbinger of more difficulties reaching the real economy.”

For the AXA IM expert, the SVB case may also have implications for Fed policy. “It is likely to trigger greater Fed prudence in the area of monetary policy (…). In the very short term, it’s going to be difficult for the Federal Reserve to ignore the SVB episode, although in theory financial stability concerns shouldn’t affect monetary policy decisions.”

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“Beyond the issue of profitability, banks may find it harder to meet their regulatory capital thresholds in times of sharp interest rate hikes. The ECB has been aware of this risk for some time,” Giles Moëc stresses.

For AXA IM, the situation also has a negative impact on the technology sector itself: “The sector was already particularly sensitive to the current macroeconomic configuration: since it combines high capital expenditures at the beginning and in most cases only produces long-term profits, it does not take well to raise the interest rate without risk. The disappearance of one of its funding sources (SVB) is not going to help.”

Gilles Moëc explains that although “SVB seems an idiosyncratic case – its concentration in a single sector (technology) made it especially sensitive to collective deposit withdrawals, especially in a situation where funding for startups is drying up and tech companies need access to their cash – supervisors and regulators didn’t take any chances.”

Moëc notes that “U.S. authorities will offset deposits from these banks above the FDIC’s normal insurance limit. Under the terms of the joint Treasury, Fed, and FDIC statement, “SVB depositors will have access to all of their money beginning today, Monday, March 13,” invoking the ‘Systemic Risk Exception’ that had been widely used during the Great Financial Crisis of 2008.” The expert points out that “this is not a bailout – no government protection has been proposed for SVB bondholders, for example – but the idea is probably to avoid a potentially painful migration of deposits from other small and medium-sized banks to larger institutions, as well as to nip in the bud the emergence of a chain of liquidity and solvency problems in the technology sector.”

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