Growing Financial Risk Concerns... Larry Fink: "More Crises Possible, Damage Hard to Gauge"

"It is too early to know how widespread the damage is." Larry Fink, Chairman and CEO of BlackRock, warned that the financial risks highlighted by the sudden collapse of Silicon Valley Bank (SVB) could spread further.

In his annual letter to investors on the 15th (local time), Fink described the SVB incident, which plunged the financial market into fears of a "systemic crisis," as one example of the "price we are paying for the 'easy money' (low-interest funds) of the past decade."

[Image source=Reuters Yonhap News]

Fink pointed to the Federal Reserve's (Fed) nearly 5 percentage point interest rate hikes last year to curb soaring inflation as the "first domino to fall," suggesting that the recent SVB bankruptcy could be the second domino. SVB, a lifeline for U.S. startups with total assets of $209 billion (277 trillion won), was abruptly shut down on the 10th due to a bank run triggered by a liquidity crisis. This is the largest bank failure in the U.S. since Washington Mutual collapsed during the 2008 global financial crisis.

Fink noted that while U.S. financial authorities responded swiftly to the incident, mitigating some contagion risks, "the market remains tense. Will the asset-liability mismatch be the second domino to fall?" He implied concerns that risks stemming from asset-liability mismatches could escalate into a major crisis.

He also warned, "More seizures and closures may be coming," and pointed out that "the consequences of easy money and deregulation on regional banks across the U.S. remain uncertain." He referenced the 1980s U.S. savings and loan crisis, during which over 1,000 lending institutions failed over a decade. He predicted, "Some banks will now withdraw loans to strengthen their balance sheets," and that "capital requirements for banks could become stricter."

Fink's diagnosis does not rule out the possibility of a third domino falling. He highlighted, "In addition to duration mismatches, liquidity mismatches can also be observed," pointing out that those who invested in low-liquidity sectors or held leveraged portfolios during the low-interest era face liquidity mismatch risks.

The 20-page annual letter was released amid heightened financial risks following the SVB collapse and the sharp drop in shares of Switzerland's Credit Suisse (CS) bank on the same day, drawing increased market attention. After Saudi Arabia's National Bank, CS's largest shareholder, announced it could no longer provide additional funding, concerns grew that financial risks might spread to major European banks. CS had previously disclosed "material weaknesses in internal controls" over its 2021 and 2022 financial reporting.

Additionally, Fink expressed concern that "as inflation continues to rise, the Fed will keep raising interest rates to lower inflation," adding that "while the financial system is stronger than during the 2008 financial crisis, the monetary and fiscal tools available to authorities for the current crisis are limited." He also noted that these financial market changes are occurring alongside shifts in the global economic environment, including Russia's invasion of Ukraine, deglobalization, and supply chain restructuring, forecasting that "all of this will sustain higher inflation for a longer period."

This content was produced with the assistance of AI translation services.