When economic and financial policies change, there are always ramifications associated with these changes. The faster and greater the degree of change that occurs increases the economic and financial ramification of these changes.
The current banking issues in the US and Europe are examples of the effect that major policy changes can have. Some are foreseen and some are not. The recent failure of SVB (Silicon Valley Bank) was caused in part by the sharp increase in US interest rates over the last year by the FED (Federal Reserve Board). They were late in compensating for US government financial and economic stimulus, which was provided to fight the negative economic impact of COVID over the past few years. As a result, the FED was caught with the highest rates of inflation since the 1970/80’s period.
To try and break the high inflation cycle, the FED proceeded to raise interest rates over the last year, the fastest increase on record, causing a sharp decline in bond values, hurting most investors. The drop in the market value of bonds in 2022, even high-quality bonds like US government, had a negative effect on the capital base of many US banks. A large majority of US banks are financially strong enough to handle the financial stress to their balance sheet, but some are not.
To prevent a wave of further failures, the US government stepped in quickly with policy changes to limit and even eliminate any further banking contagion. How successful will the US government be? Only time will tell.
Weakness in a country’s financial system tends to limit economic growth. Already in the US, interest rates on bonds two years or longer have dropped, predicting an economic slow down. This should allow the FED to lower interest rates sooner than expected even a few weeks ago.
In summary, the banking problems will slow economic growth but there will not be a credit crisis like 2008/2009. The financial system is much more structurally sound than before. I will continue to stay conservative in investment holdings with a dividend paying bias when possible.
If you have any questions or concerns, please feel free to contact me.
Best regards,
Bill Achtymichuk, CIM®, FCSI®, CFP®
Portfolio Manager / Senior Wealth Advisor
iA Private Wealth | Active Wealth Partners
Insurance Advisor| iA Private Wealth Insurance*
1005, 10010 106 Street
Edmonton AB, T5J 3L8
T: 780-944-2690
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