By Colin Clunie, Head of EMEA Operations at Clearwater Analytics
The recent string of banking failures has been a sobering reminder to everyone that the large banks that dominate the financial world are just one major crisis of confidence away from a severe fallout that can have serious ripple effects across global markets. The shotgun merger of UBS and Credit Suisse last month was the latest, and arguably greatest, in a series of recent events, including the collapse of SVB, that have shaken investor confidence.
Indeed, this is demonstrated by the results of Bank of America’s monthly survey of institutional investors, conducted between the SVB and Credit Suisse failings, that shows investors are holding onto an increased amount of cash. This is always a surefire sign that things aren’t going right in traditional markets – if institutional investors are choosing to hold onto capital with safety in mind, rather than putting it to work.
Whilst the focus has inevitably been on the balance sheets of banks, what must now be top of investors’ minds is the heightened requirement to have an in-depth understanding of their own risk exposures. I am sure that when the news of UBS and Credit Suisse’s forced union broke, many an investor was thinking “am I exposed to this in any way?”. This is especially relevant when you think of the $17bn ($13.6bn) in Credit Suisse AT1 bonds that were written off by the Swiss regulators – there are many investors who must have been sat with these bonds on their books, and could have potentially diverted strategy when the walls started tumbling a few weeks ago.
Granted, it wasn’t standard practice for the regulators to pay the shareholders out before those holding debt, but anything can happen when a bank the size of Credit Suisse starts to collapse.
This is even more important given the increasingly diversified investing strategies that are carried out now, compared to the last banking crisis of 2008. Investors are likely to be exposed to these banks in more complex ways than previously, be that through very niche bonds, complex and often opaque derivative products, or some other form of credit. It begs the question, who else is sat on exposures and which assets that might be considered safe right now, will be considered extremely risky in two weeks’ time?
When you invest in a wide range of assets, you are often dealing with very different types of data in your internal systems, and having the ability to quickly pull up a very clear and transparent view of all of your holdings isn’t as common as you’d expect. But therein lies a major issue when it comes to risk management – you need to have a real-time understanding of your risk exposures in order to make real-time decisions on how best to manage that risk. It is critical to have a single lens across all investments to aid time-pressed strategic investment decision making, to ensure that you are not left behind as the market reacts to the latest leak.
This banking crisis has put risk exposure back to the surface for everyone. The collapse of a 166 year old, mammoth banking institution has echoes of 2008 about it, but the technology available to investors now is very different. What the events of the last month have re-emphasised is the importance of real time, daily, validated, and reconciled pricing data on investors’ whole portfolios, so that they can properly understand their exposure to what they may have thought last week were rock solid assets.
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