Banking Crisis Raises Concerns About Hidden Leverage in System
This article from Bloomberg may be of interest. Here is a section:
Fund managers are also concerned. A systemic credit event poses the biggest threat to global markets, and the most likely source of one is US shadow banking, according to a survey of investors published last week by Bank of America Corp.
The US government’s top financial regulators signaled in February that they would consider whether any nonbank firms merit tougher oversight as systemically important institutions.
The Financial Stability Oversight Council will put “nonbank financial intermediation” back on the table as a priority for 2023, according to a statement from the Treasury Department. The Federal Reserve, the Federal Deposit Insurance Corp. and the Financial Stability Board declined to comment for this story.
European Central Bank Vice President Luis de Guindos warned in an interview with Business Post published on the ECB website Sunday that nonbanks “took a lot of risks” during the era of low interest rates and potential vulnerabilities “can come to the surface” as monetary policy changes.
It has been my view for at least the last 2 years that the epicentre of risk resides in private markets. What does that mean? It was where leverage was focused in the bull market and where valuations have increased the most. It is therefore the most likely to experience stress as liquidity tightens. Trouble within the sector is also likely to be the catalyst for central bank easing as they move to forestall the risk of a deep recession.
The worst affected portions of the sector will also be most likely to form lengthy Type-3 base formations. The vintage of funds will be a key differentiator. Those that bought immediately following the credit crisis have significant appreciation to back them up (Blackstone). Those which paid peak values from 2017 to 2022 (Softbank) are most at risk while those seeking to start now are likely to have some of the best returns over the next decade.
First Citizen’s purchases on Silicon Valley Bank’s assets for pennies on the dollar set them up to benefit significantly over the coming decade even assuming a higher than normal default rate during a recession.