While concerns around unrealized losses on loan portfolios and balance sheet securities are partially to blame, we see the latest decline in banking shares as a panic that was initiated by meaningful deposit outflows. Markets have been in a short-selling spiral, where weaker, individual banks are targeted, their stocks decline, and headlines trumpet broader concerns about deposits. And as institutions fail, “systemic confidence” is eroded.

A Gallup survey released May 4 found that nearly half of participants were either “very worried” or “moderately worried” about the safety of their bank deposits.¹

The increase in capital and stronger risk management standards following the Global Financial Crisis sought to make the US and world banking system much safer. From a macro level, the data are unambiguous and positive as equity capital surged relative to lending. The nature of the post-Covid recovery – led by stimulus, not private borrowing – also makes a systemic banking/credit crisis far less likely.

The US economy’s underlying resilience shouldn’t be forgotten in moments of fear. The coming slump in the US economy won’t be historically severe. The recession we anticipate should be mild even if some small banks don’t survive. This was the pattern of the 1990/1991 downturn in the aftermath of the savings and loan crisis. While earnings declined by less than many feared in Q1, we see market expectations for a rapid recovery in profits by H2 2023 as overly optimistic.

Our positioning in portfolios seeks to weather market uncertainty while potentially generating reliable income as we wait for a better moment to add risk. We most recently moved to increase global diversification, building positions in non-US assets trading at significant discounts to the US while reducing our overweight to the US dollar.