For the month as a whole, the US S&P 500 Index fell 3.7 per cent measured in USD, while the European Stoxx 600 Index dropped 0.2 per cent measured in EUR, the Nordic VINX Index rose 2.5 per cent measured in NOK and the more economy-sensitive Oslo Stock Exchange fell 3.8 per cent.
«Run on the bank»
The massive withdrawal of deposits from Silicon Valley Bank (SVB), until then a relatively little-known US regional bank, created unrest in the market at the beginning of March. As a result of a fall in the value of investments in, among other things, US Treasuries, SVB was unable to meet its commitments when it experienced a “run on the bank”. The losses are due to investments that were presumed to be safe falling sharply in value due to long durations and a historically rapid rise in interest rates. The banking turbulence gradually spread to other banks, and small banks in particular saw customers withdrawing funds from their accounts. To curb this huge withdrawal of deposits, the authorities had to intervene in a coordinated manner not seen since the pandemic or the financial crisis.
Self-reinforcing effects
Losses on so-called "hold-to-maturity" portfolios, such as SVB experienced, may have been partly caused by the Trump administration’s relaxation of regulations. In Europe, banks have been strictly regulated, but this did not prevent the uncertainty from spreading to the European banking system. Swiss bank Credit Suisse, which has long struggled to be profitable, was caught in the undertow. The Swiss authorities forced a rescue through an acquisition from a competitor, UBS. To prevent self-reinforcing effects from spiralling out of control, tools such as liquidity measures and deposit guarantees have also been used in the US.
Dilemma for central banks
Right now, the damage control by the authorities and central banks seems to be over. As a result of the banking crisis, the markets are now pricing in that the US central bank (Federal Reserve) will take this into account in the future through a pause in interest-rate hikes. The risk to financial stability of implementing precautionary measures is that increased liquidity and a lower projected interest-rate path may contribute to inflation remaining at a higher level. Central banks therefore face the dilemma of complying with a monetary policy that is tight enough to curb inflation while also ensuring financial stability.
The road ahead
Global shares, as measured by the MSCI World Index in local currency, rose by approximately 3 per cent. Although the banking crisis may have a negative impact on economic growth, increased liquidity and a fall in the interest-rate level made positive contributions. Both inflation and the timing of a possible recession will probably still be in focus but, in total, shares still seem to be a good investment option for long-term savings.