- Fink questioned in the asset liability sector will be the next to fail in a follow-up crisis.
- According to Fink, the financial sector is haunted by unsustainable policies of past years.
Larry Fink, the chairman of the asset management firm Blackrock believes that the markets are on the edge, despite the swift reaction by regulators to stave off contagion risk in the wake of recent bank failures. Fink expressed fears over a follow-up crisis in asset liability, questioning if it could be the next sector to fail.
The asset management chair shared his opinion about the current market situation via his traditional annual letter to investors. In the letter, he noted that a lot has changed in the markets in the last 15 years. According to him, since the 2008 financial crisis, markets were defined by extraordinarily aggressive fiscal and monetary policy, leading to spikes in inflation figures that have reached levels not seen since the 1980s.
In the letter, the chair noted that to curtail the spiking inflation, the Federal Reserve raised interest rates by nearly 500 points in the past year. He believes this fallout of unsustainable policies of past years has finally turned around to haunt the financial sector.
According to Fink, despite the bond markets being down by 15% last year, it was not enough as the market still found floors underneath to fall to. He noted that the recent rate hikes, which are the most frequent since the 1980s, exposed the cracks in the financial system.
Fink believes the failure of Silicon Valley Bank (SVB) is a classic asset-liability mismatch and the biggest bank failure since 2008. He thinks it is too early to know the extent of the ripple effect of the situation, considering that following SVB’s crash, two other smaller banks collapsed. He commended the regulatory response but questioned if it would be enough to prevent another crash in a related sector.
We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector with more seizures and shutdowns coming.
However, Fink thinks it has become inevitable that some banks will need to pull back on lending to shore up their balance sheets. That would mean a rollout of stricter capital standards for banks.