One financial firm in particular worries analysts. At risk would be the stability of the entire global banking system.
Although the financial markets have recovered part of the loss recorded following the collapse of the Silicon Valley Bank in recent weeks, some experts continue to show their worried about the possibility that a new tsunami could be unleashed on the global banking system.
Attracting the attention of analysts this time is a financial company that offers financial services to consumers, small businesses and companies, including checking accounts, credit cards, personal loans, mortgage loans, investments and commercial banking services.
Will this really be the next bank to fail on the international scene? Or is the worst already over?
Capital One Financial Corporation: CDS and balance sheet data are worrying
The Credit Default Swap (CDS), derivative financial instruments used to manage credit risk, with underlying securities of Capital One Financial - the US financial company in question - recently recorded a surge, alerting analysts about the solidity of the banking institution. Although the company is not at extremely critical levels, the assets for sale are still high relative to its net worth: if Capital One were to face a substantial "bank run" it could be forced to sell the securities Hold to Maturity (HTM) ahead of maturity to meet liquidity needs, posting large capital losses, just like Silicon Valley Bank did.
Analysts were also concerned by the balance sheet data recorded by the bank in 2022: Capital One Financial recorded a 12% decrease in revenue, with a reduction in EPS by more than 30% quarter over quarter.
Concerns were heightened following communication from Walmart that it would end early its multi-year partnership with Capital One. The debate has resulted in a full-blown legal battle that could jeopardize a $8.3 billion card portfolio.
Banks in crisis: is there really anything to worry about?
Similarly, the Fed has shown itself ready to intervene if necessary. This is demonstrated by the terms of "The Bank Term Funding Program (BTFP)" which allow the US central bank to support the balance sheets of banking institutions within the limits set by the programme. It is therefore a particularly delicate situation and strictly dependent on future monetary policy decisions by the Federal Reserve: an increase in the level of interest rates could in fact significantly aggravate the situation.
However, events such as those involving the SVB and Credit Suisse are typically the bearers of deflationary winds, which could incentivize the central bank to interrupt its restrictive monetary policy by easing the risks associated with the early sale of Holds to Maturities (HTM).
However, this would not improve the situation of Capital One which, likewise, would probably have to face a contraction in revenue from the commercial side.
Original article published on Money.it Italy 2023-04-11 16:21:41. Original title: Quale sarà la prossima banca a fallire?
