Is There A Financial Crisis On The Horizon?

Is There A Financial Crisis On The Horizon?
March 2023 has seen several US bank failures, Switzerland's second biggest bank bailed out in an emergency merger, and stock prices plummet. Is this just an unfortunate cluster, or the beginning of a financial crisis?  


March 2023; A Banking Disaster

To say that the last few days in the banking world have been dramatic would be an understatement: On the 10th March, the Silicon Valley Bank (SVB) was closed down by Californian regulators after interest rate hikes forced it to sell securities and subsequently plunged the bank's stock price by 60%, wiping out over $80 billion in value from its shares. Some of its biggest customers began to withdraw funds in response, causing a historic run on the bank. SVB was the 16th largest bank in the United States at the time and its closure represents the second-biggest bank failure in U.S. history.

The fall of SVB caused a market-wide panic and catalysed a second run on deposits by customers. Just two days after SVB was closed by authorities, the Federal Deposit Insurance Corporation (FDIC) shut down the Signature Bank in New York.  It was the third-largest bank failure in U.S. history. 

On the 15th March, the turmoil reached Europe when financial giant Credit Suisse began to crack; share prices dropped by 24% after the Saudi National Bank refused to provide it with more money, sending the shares tumbling to a record low. Switzerland's central bank stepped in with a $54 billion lifeline, and the bank has since been saved by Switzerland’s biggest bank, UBS, when it agreed to buy it out for 3 billion Swiss francs in an emergency merger.

On the 16th March, the First Republic Bank in San Francisco became the third US bank to experience a run on deposits. A private sector rescue has since prevented it from collapse, but the bank's stock fell as much as 50% despite the $30 billion injection.

The knock-on effect presented in stock prices falling around the world, particularly banking stocks. Benchmark indexes of shares in US and European banks lost 20% and 13% respectively since these events. This triggered drops in yields for US Treasuries and Eurozone bonds, prompting a rise in alternative investments such as gold and bitcoin as investors sought safe havens away from banks.

Financial Predictions

Analysts at Goldman Sachs have lowered their Q4 2023 forecast of US GDP growth due to a believed risk that smaller banks will slow down on loans and preserve liquidity in case of a banking crisis. Goldman Sachs suggested that the American economy has a 35% chance of entering into a recession within a year in comparison to 25% before the banking sector issues began. Corporate defaults also appear to be on the rise; reports by S&P Global claim that in 2022, Europe showed the second-highest default rate since 2009. S&P expects the US and European default rates to reach 3.75% and 3.25%, respectively, by the end of summer; approximately 2% higher than the previous year. 

The European Central Bank has raised interest rates by 50 basis points and its deposit rate is the highest it has been since late 2008, at 3%. According to the Office for Budget Responsibility (OBR), British citizens are facing their biggest drop in spending power in the last 70 years following the challenges of low growth and high debt, as well as the effects of Brexit.

Good News For Alternative Investments

Banking uncertainty and rising inflation are driving investors towards “safe havens” such as gold, bitcoin and other alternative investments. During the recent banking crisis, Bitcoin climbed to nine-month high surpassing $28,500 for the first time since June 2022 and up nearly 70% since the beginning of 2023. Ether, the second-biggest cryptocurrency after Bitcoin, spiked to a seven-month high of $1,846.50. Gold prices also rose by 1% at $2,007.30 per ounce, to their highest since March last year, and US gold futures climbed by 2% to reach $2,012.50.

Real estate has historically been a hedge against inflation and a solid asset class. Property has long been a reliable alternative investment, offering lower volatility and higher returns to a portfolio than traditional assets, although often at the cost of illiquidity. Over the last 70 years, real estate values have continued rise overall, weathering several recessions, and sometimes even increasing during the recession itself.

Housing is always in demand, regardless of the financial climate, inflation rates and interest rates; people always need somewhere to live. Compared to other investments such as stocks, bonds, Mutual Funds etc., real estate is more stable in the long run. Stocks can easily be affected by economic crises but real estate is a physical, tangible asset. A property price does not drop by 70% as the result of a bad news announcement!  Max Crowdfund publishes real-estate based projects almost exclusively, with an average interest rate of 10%. Click on the green link below to see the current investment opportunities on MCF.

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