The end of ‘free’ money
After 15 years of ‘free’ money, we’re now seeing what breaks when interest rates shoot up. Silicon Valley Bank, Signature Bank, Credit Suisse, as well as wider confidence, have all vapourised at speed. It is difficult to say where the next fractures will appear but there are undoubted stresses in the private markets, asset management and real estate and with those who borrowed excessively in the good times. What next and what are the implications for our clients?
Banks will become more boring
The irony is that the framework put in place after the last financial crisis has worked well (especially in UK and Switzerland, less so in the USA where some of the new regulations weren’t implemented). Bank resolutions have been for the private sector, the taxpayer hasn’t (yet) been troubled. But in a sense, the regulations put in place since 2008 are fighting the last war. We can expect the regulatory burden to tighten further, a consequent fall in lending appetite, credit will become scarcer and that means slower economic growth.
Less money for more frivolous and ambitious ventures
With credit contracting, more marginal start-ups become unviable, fund raising becomes more difficult and we’ll likely see the failure of some fintech, medtech and other businesses. We’ll see greater realism in the commercials of many businesses – cash conservation will be king and a quicker path to profit will become imperative.
Approaching the peak of the interest rate cycle
Central Banks have two main roles – to control inflation and to keep order and stability in the financial markets. The ECB ‘chose’ price stability last week and raised rates again. However, the events of the last two weeks will have been very deflationary – and that means the likes of the Fed and Bank of England will not need to raise rates as fast, if at all, to contain inflation. That said, core price rises are still persistent and wage expectations are still rising. While we may have peaked in terms of interest rates, those rates will still remain higher for longer and will not fall as quickly as the market is expecting.
It’s a reminder that risk, in all its guises, needs to be managed and diversified
A company should not leave all its cash in one bank – or indeed rely on one bank to provide all its sources of finance. Credit risk, operational risk, market risk all require attention. As does reputational risk – values, behaviours, standards are all under scrutiny. The world is more transparent, more judgemental, and less forgiving on those who get it wrong. The biggest takeaway of all – culture matters.
A toxic culture will eventually be exposed and will be an existential risk for those who don’t manage it.
Getting your comms right matters more
Sloppy language, loose lips and ill-judged commentary transmits faster and has more impact in today’s world. One poorly phrased sentence saw 20% of SVB’s deposit base evaporate in 24 hours. The messaging of difficult and bad news should be scripted and practised. Communications needs to be front and centre, not an afterthought. There is less room for error and companies need to invest in getting their messaging right.
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