This is all in the new environment of bank instability precipitated by Silicon Valley Bank, Signature Bank and Credit Suisse. Liquidity ‘windows’ have been thrown open by the Federal Reserve, which should avert a GFC-like situation. The responses and approach of the ECB and regulators need to be spritelier than the Swiss were with Credit Suisse, or otherwise, Deutsche Bank does look vulnerable to short-sellers.

Despite substantial liquidity, banks in the US were already tightening lending standards at levels similar to early COVID, GFC and the tech wreck. We can see this in the graph below where the black line is inverted to show the increase in tightening standards from net respondents. This is prior to the turmoil with US regional banks and Credit Suisse.

Recent events can only add to tighter conditions for lending, notwithstanding central bank actions to improve liquidity. The reality of lower business investment, moderating new home starts and lower automobile sales, occasioned by significantly tighter bank lender standards, underscores a recession in the second half of 2023. This will be a deeper recession, should the Federal Reserve not allow the lag effects of monetary policy tightening to flow through (which they are as seen in the severe tightening of bank lending standards).

The ‘wheels’ of an economic slowdown are well and truly operating.

Recent bank sector events can only add to this. To what extent central banks truly appreciate the extent of system fragility they have largely helped to create remains to be seen. However, a soft landing is looking more remote.

The practical implications for us are that credit spreads should probably be wider than where they are, and the US equity market still appears to have a benign view favouring a soft landing. Bumpier times are ahead.