Just as a dying star forms a black hole, imploding banks are creating a great liquidity-sucking void.

Not only will funding be harder to find, it will also be significantly more expensive.

Who could have guessed that Silicon Valley Bank, Signature Bank, and even the 167-year-old Credit Suisse would collapse?

Having spent half a decade in Zurich myself, I can’t picture life without those clinical navy blue letters glaring down from every street. The bank was literally “too big to fail”, and yet it did.

It’s surreal to think this much-loved financial giant – with $575 billion on its balance sheet – would be brought down by loss of confidence.

Seeing something so invincible break is a real mindf**k. It’s like catching your dad’s eye after he just got fired. Or reading that your favourite rockstar is now incontinent. It doesn’t fit the image.

“The events of the last week makes everyone realise that no one is infallible”, affirms Dave Symondson, Director at DevBrok, Asset Stone and Assute Capital.

Shaken confidence

The collapses inevitably created a weird atmosphere. At finance conferences, panelists mutter in hushed tones about the, “bank-that-cannot-be-named”. Like they’re Voldemort. If the speaker is suited, they usually mean Credit Suisse. If they’re sporting a zangy jumper, it’s probably SVB.

There’s some caginess among lenders too.

“Seeing all these negative headlines may result in some lenders shying away from the market”, reflects Tiba Raja, Excutive Director at Market Financial Solutions.

“If it can happen to Credit Suisse, who else can it happen to?”, questions Simon Pollins, CEO of The Mezz Lender.

Market participants are peeking around like nervous lemurs, wondering which banking giant could fall next. But – ironically –  this thinking can lead to a self-fulfilling prophecy.

“A lot of the time when you have a run on the bank, it’s about perception rather than reality”, Pollins explains.

Confidence is everything. My anonymous source who goes by the name of Mr X reveals how UK banks are unlikely wobble anytime soon simply because there is more faith.

“The PRA tighter supervision and the swift response of the UK Government to SVB UK purchase by HSBC reinstituted market trust”, they comment.

My secret informant, does however feel that more bank closures are imminent in the US.

Weaknesses stem from, “the combination of lost trust, short selling and regulatory environment fuelled banks’ vulnerability in a rising interest environment”.

As I write, there’s speculation that Deutsche could be next big banking star to implode. But almost as soon as the first whispers emerge, they’re drowned out by other news.

How much of this is real? How much of anything is real?

Banks’ liquidity pools are drying out

But before I spiral down a psychedelic rabbit hole… Something that’s definitely real is that bank funding lines are fraying.

The three collapsing intuitions have “reduced the amount of liquidity out there”, affirms Pollins. “Funding can dry up any day essentially”, he adds. Like a strained rope, individual liquidity threads from banks are pinging off, one by one.

The reason is probably because banks are conserving capital. JPMorgan, for example is carrying a whopping 15.5% of its assets in cash, as it makes liquidity hoarding part of the strategy.

US banks are heaving in their funding lines like sailors pulling ropes in a storm. It’s created a liquidity crunch for lenders. The recent collapses have sucked up great pools of capital like a black hole or the Bermuda Triangle.

Funding lines will not only be harder to get now, they will also be more expensive. As the demand is so much stronger than the supply, the price will increase.

The US banking black hole is even absorbing some of the liquidity from the UK markets.

In the same way you’d discreetly glance to check if your fly is undone, lenders’ eyes now are cautiously flicking to their loan books and liquidity lines. After all, without secure funding, how can they lend?

And that’s not the only issue British lenders are faced with.

Sinking profitability

In March, the Bank of England hoisted up interest rates to 4.25%. You can almost feel the collective heart palpations of city lenders as they grapple with what this means.

Deals that made so much sense just a few months ago suddenly feel unworkable.

In a world where reputation is like a currency in itself, nobody wants to be the first to go back on deals.

Bridging lenders reliant on bank funding are trying not to panic.

It was Warren Buffet who commented that you never know who’s been swimming naked until the tide goes out.

Well, the tide is turning now. And some lenders may be about to get red-faced.

“I suspect some of the larger players already have some risks on their balance sheets that they haven’t recognised yet”, warns Pollins.

A good moment for strategic lenders

But not everyone is worried. Bridging lenders who don’t totally rely on banks are confident. They may get a little swayed into the liquidity black hole, but it’s not strong enough to devour them completely.

“[This is why] it’s so important to have diverse funding lines, better reserves in place and good risk strategies”, Raja stresses. “With multiple sources behind you, you’re less at risk should one of these main institutions fail”.

Symondson agrees. “The strategy of investments is critical”, he emphasises. “The ongoing management of the investment needs to be robust and proactive”.

For the lenders who’ve been quietly buffering against risks for years, this must finally be their moment.

Like the hardworking squirrel who collected nuts all summer long, they’re prepared for the long winter.

Who knows, they may even be able to help out a few lazy squirrels too. Perhaps mergers and acquisitions are around the corner for bridging lenders.

Ever the pragmatist, Raja has a refreshingly brisk approach. She’s smashing up the black hole vibes with strategy. “I think lenders may be at risk of falling victim to short-term sentiment”, she comments.

“We need clear heads for the coming months, and a refocus on the essentials”.

Hannah Duncan

Hannah Duncan is a freelance writer with a passion for finance, sustainable investing and fintech. She loves writing engaging content for industry magazines and investment services, as well as keeping a personal blog at www.hdinvestmentcontent.com

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