In mid-March, the collapse of three US regional banks caused turmoil on the financial markets.
(Photo: Reuters)
Frankfurt The situation has calmed down somewhat after the earthquake in the banking market in March. But Sjoerd Leenart, Global Head of Corporate Banking at US bank JP Morgan Chase, does not believe that the turbulence is over and he expects that the crisis will influence the banks’ future strategy.
“We are experiencing an exceptional situation in every respect, regardless of whether it’s about geopolitical tensions, national debt, inflation or the rapid turnaround in interest rates,” says the banker in an interview with the Handelsblatt. Nobody expected interest rates to rise so quickly. Such a scenario was not simulated even in some of the stress tests that banks have to undergo on a regular basis.
In mid-March, the collapse of three US regional banks caused turmoil in the markets that spread to Europe. The already ailing major Swiss bank Credit Suisse was taken over by larger local rival UBS in an emergency operation orchestrated by the state. Deutsche Bank also came under pressure for a short time after investors had built extensive bets against the shares of the largest domestic financial institution.
Financial institutions are concentrating more on their core business
According to Leenart, the recent problems in the financial sector will further reinforce an already existing trend: “Many banks are concentrating more on their core business and their home market.” Some banks have already sold foreign subsidiaries and want to concentrate their presence “where they really are are competitive”. It is difficult for many banks, especially in investment banking, to assert themselves outside of their home market.
The banker hopes that the financial system will become more stable overall as a result of the financial institutions concentrating on their strengths. Last year, for example, the major US bank Citigroup gave up its retail banking business in Mexico, and the major British bank HSBC sold its Canadian business to the Royal Bank of Canada.
The manager is Global Head of Corporate Banking at major US bank JP Morgan Chase.
(Photo: JP Morgan)
Leenart assumes that the profitability of the financial institutions will suffer from the turbulence and its consequences, but he considers a systemic banking crisis like that of 2008 to be “very unlikely”. “We rate the credit quality in the corporate sector quite positively overall,” emphasizes the banker. However, there are two critical areas where financing problems could arise: parts of the tech industry and the real estate market.
Bottleneck for tech companies
“Start-ups have raised a lot of capital in the past, but that window is pretty much closed now,” says Leenart. The banker expects a selection process in the technology industry: “Many companies will survive this phase, but there will also be failures.”
The market for commercial real estate is suffering above all from the rapid turnaround in interest rates. Outstanding loans would now have to be refinanced at significantly higher rates, while at the same time property valuations came under pressure.
Leenart isn’t the only expert who sees the commercial real estate market as a potential trouble spot. Prominent hedge fund manager Paul Marshall has just warned of a crisis of confidence in this area. Commercial real estate and above all office buildings are the next risk factor for the financial system after the banking turmoil.
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According to the rating agency Moody’s, office vacancies in the USA are at their highest level since the 1980s. A number of office property owners have stopped servicing their loans and are poised to let the buildings go back to the banks.
The US government is considering stricter regulation of medium-sized banks. US President Joe Biden called for stricter requirements for banks at the end of March. The proposed recommendations would see the reintroduction of stricter rules for financial institutions with assets between $100 billion and $250 billion. These regulations were abolished by the US Congress and the Federal Reserve during the administration of Biden’s predecessor, Donald Trump.
Leenart is convinced that the tougher regulation after the financial crisis has made banks safer, but he also points to the unwanted side effects. “The demands on the banking sector as a whole have increased significantly over time, which is now partially limiting the ability of banks to support their customers.” There is a fine line between securing the banking system and ensuring its competitiveness.
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