Credit crisis surges to top of investors’ list of worries

The threat of a credit crisis that creates damaging shockwaves across the global financial system has overtaken inflation as investors’ biggest worry in the wake of a spate of US bank collapses.

Almost a third of fund managers highlighted a “systemic credit event” as the biggest risk to markets, according to Bank of America’s closely watched monthly survey, which canvassed the views of investors overseeing a combined $621bn of assets. The survey was carried out in the wake of the failures of Silicon Valley Bank and Signature Bank, but before the Swiss government forced through a takeover by UBS to rescue ailing lender Credit Suisse.

The troubles in the US banking system sparked an investor stampede out of the sector, which until February had been among the most favoured by global asset managers. Fund managers moved to a net 3 per cent underweight in the US bank sector, a drop of 22 percentage points since last month.

“Contagion risks across US regional banks drove investors out of the US bank sector this month at the fastest pace since Russia’s invasion of Ukraine,” said Michael Hartnett, chief investment strategist at BofA global research.

The KBW bank index, a broad US banking benchmark, has dropped 27 per cent since the start of February.

The shift in investor sentiment echoes comments by BlackRock chief executive Larry Fink, who earlier this month warned about the risk of a “slow rolling crisis” in the US financial system “with more seizures and shutdowns” following SVB’s failure.

Investors also retreated from the European banking sector during March as the crisis at Credit Suisse intensified after it admitted to “material weaknesses” in internal controls over financial reporting. Saudi National Bank, the biggest CS shareholder, then ruled out providing any more financial assistance in a blunt vote of no confidence in the beleaguered Swiss lender.

Just over a third of global fund managers also worry that the most likely source of a systemic crisis lies in the “shadow-banking” sector where less regulated players, such as private credit managers, have grown hugely in size over the past decade and become significant competitors to established banks.

Concerns that problems are brewing elsewhere were evident with a net 46 per cent of fund managers describing their perception of counterparty risks as “above normal”, a jump of 25 percentage points since last month to the highest level since the early stages of the Covid-19 pandemic in May 2020.

A net 42 per cent of fund managers also said they expected a global recession this year, the first increase in this measure since November 2022.

 “Regardless of whether more financial institutions run into trouble, it is looking increasingly likely that we will see a bigger tightening of credit conditions which will weigh on economic activity,” said Vicky Redwood, a senior adviser at Capital Economics.

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