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Turbulence in the financial system

Concerns about the stability of the international financial system have increased in recent days.

At the origin of the current shock wave through the financial system is the bankruptcy of the American Silicon Valley Bank (SVB) last Friday. SVB suffered significant losses on its long-term investments due to the sharp interest rate hikes by the US Federal Reserve. At the same time, short-term obligations to depositors remained, which eroded equity. When a large number of investors wanted to withdraw their deposits, the SVB no longer had sufficient liquidity and could no longer meet its obligations. 

Credit Suisse in the wake of the SVB bankruptcy

In response to the collapse, the US authorities decided to fully protect the deposits of SVB's clients and give them unrestricted access. In addition, the authorities assured that from now on all American banks would receive sufficient liquidity to prevent a compulsory sale of long-term investments and thus a similar case. Admittedly, SVB was not a usual commercial bank, but a bank that was mainly active in the riskier start-up and venture capital sector. Nevertheless, the bankruptcy of the SVB has had a lasting impact on the confidence of investors. This is shown by the fact that the fears spread from the American to the European continent. The focus of attention was in particular the major Swiss bank Credit Suisse (CS), which suffered a massive drop in its share price due to the strong uncertainty among market participants.

The Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) confirmed yesterday evening that the problems of some banking institutions in the USA do not pose a direct risk of contagion to the Swiss financial market. The strict capital and liquidity requirements that apply to Swiss financial institutions ensure their stability. In addition, an unmistakable signal was sent to the markets that Credit Suisse would not be dropped and that the SNB would provide liquidity to CS if necessary. This has already led to a significant recovery in the Credit Suisse share price.

Client deposits not at risk

The deposits of PostFinance customers are not endangered by the recent turbulences of the banks mentioned above. The mutual Funds and ETF’s managed by Credit Suisse and held in the PostFinance portfolios have the status of separated assets which, in the unlikely event of insolvency, will not be included in the insolvency estate and are therefore protected for investors.

Sticking to the defensive positioning

Nevertheless, the momentum of the last few days is likely to have a lasting impact on economic development and thus also be felt by PostFinance customers. This is because the latest developments catapult the central banks into an uncomfortable predicament. Further interest rate steps, which would actually be necessary to weaken the stubborn inflation dynamics, could further endanger the stability of the financial system. Central banks will thus be faced with the choice of either allowing high inflation rates or exacerbating the banking crisis.

In this dilemma, we expect central banks to give greater weight to financial stability and thus accept higher inflation dynamics. Against the background of the increased risks in the financial markets, we are maintaining our defensive orientation and the underweighting of equities and bonds. However, we will continue to closely monitor the situation for our clients.

Philipp Merkt

Chief Investment Officer