SVB failure - cause & impact for banking sector and markets; Payment delays & the USD30bn liquidity gap in B2B trade

SVB failure - cause & impact for banking sector and markets; Payment delays & the USD30bn liquidity gap in B2B trade

If you owe your bank 1,000 USD, that’s usually your problem; if you owe a bank 100mn USD, that might become the bank’s problem. And in banking or finance, trust is the only thing you have to sell; if that fails, the implications can be dramatic with potentially rippling effects across the markets. Most recent example of a bank in need of bailing out by authorities is the SVB (‘too small to regulate, too big to fail’), our focus story this week. The spillover risk for the European banking sector is limited so far and shock absorbers are in place; more also on the monetary policy response in uncertain times. In our earlier publication this week, we looked into payment delays by companies due to the economic downturn and the USD30bn liquidity gap in B2B trade.

In focus – SVB failure: cause and impact

You’ll find the complete ‘hot’ topic report including the feature story here.

  • The SVB failure was caused by poor risk management choices but also highlights banks’ general macro-financial challenges from restrictive monetary policy, which essentially removes diversification. Negative returns from bonds and equity put pressure on assets while quantitative tightening has led to a contraction of money supply, resulting in greater competition for deposits (as banks lend less).
  • Essentially, SVB was the epitome of wrong-way risk – it accepted very lumpy deposits from start-ups (which parked their venture capital funding), used related-party equity in these start-ups to collateralize loans and invested excess funds in mostly long-dated mortgage-backed securities at a time when the yield curve was inverting even more, squeezing their net interest margin. As much as central banks’ fast rate hikes to tackle inflation hit the bank’s asset side (resulting in unrealized losses that exceeded their capital base) they also caused an economic pinch for their start-up depositors, who started withdrawing their funds long before the deposit run that brought SVB to its knees.
  • In the wake of SVB’s failure, banks will become even more conservative in their lending. The planned resolution of the SVB imposes direct cost of other US banks, which will foot the bill for making all depositors whole (though higher FDIC fees) but, more critically; there is also an indirect effect of rising moral hazard in the banking sector as the Federal Reserve seems to be willing to still backstop failing banks. Over the near term, financing conditions are bound to tighten further in the US economy (and other countries) as banks raise lending standards and carefully safeguard their liquidity positions, further retrenching credit.

What topics to watch

  • Implications for the European banking sector – little spillover risk so far and shock absorbers are in place
  • Monetary policy response – rates close to peak as retrenching credit and slowing growth will do the heavy lifting to bring down inflation
  • Implications for markets – headed for hard landing in the blink of an eye! 

You’ll find the complete ‘hot’ topic report including the feature story here.


Mind the gap: the USD30trn global liquidity gap is here to stay as payment behaviors likely to deteriorate in 2023

Looking at financials of companies, extension of payment delays and increase in inventories triggered a jump in Working Capital Requirements in 2022. Going forward, WCR is likely to remain broadly stable globally, thanks to lower inventories compensating for the deterioration in payment behaviors. We have explored the expected impact on the global B2B liquidity gap for the entire universe of listed and non-listed companies, the key findings:

Costly operations. Global Working Capital Requirements (WCR) for listed companies increased by +9 days to 72 days of turnover in 2022 – the largest annual increase since 2008 – following an increase of +3 days in 2021. APAC (+10 days to 77 days of turnover incl. +15 to 59 days in China and +2 in Japan) and Western Europe (+7 days to 68 days) recorded the strongest increases, while North American and CEE firms only registered +6 additional days of WCR. Lower growth, higher inflation, the higher cost of financing and more non-payments explain this rise of WCR. As a result, companies are spending a lot of their financial resources just running the business and less on investment, product development, geographical expansion, acquisitions, modernisation or debt reduction.

Pay me later, maybe. Day Sales Outstanding (DSO) and Days Inventories Outstanding (DIO) equally contributed to the annual rise in WCR, increasing by +5 days to 59 and 50 days, respectively, while DPO modestly accelerated (+1 to 36 days). This fast DSO increase means that the number of days it takes a company to receive payment for a sale is increasing and suggests that more companies are and will be experiencing delays in receiving payments, which can result in cash-flow problems. Overall, 17% of companies worldwide are paid after 90 days. Suppliers’ role as the invisible bank is coming back in full force, increasing liquidity risks in the system.

Just in time to just in case. Similarly, the physical supply disruptions of 2021 continued to affect corporate balance sheets. The shift from “just-in-time” inventory management to “just-in-case” turned shortages into oversupply. Today, 34% of companies have inventories exceeding 90 days of turnover, with four sectors noticeably most exposed: transport equipment (46%), textiles (39%), electronics (38%) and machinery equipment (36%).

In 2023, more of the same. We forecast global WCR to remain broadly stable, both DSO and DPO should increase slightly (+5 combined) while DIO should decrease by about the same. Indeed, in a context of slowing economic activity, oversupply in manufacturing sectors and tightening financial conditions, inventories are likely to decrease while payment delays should increase as in previous economic downturns.

Liquidity matters. Looking at the entire universe of companies, well beyond listed companies and including SMEs, our proprietary calculation of the global B2B liquidity gap is expected to remain stable at around USD30trn, with the US and Europe accounting for USD5trn each, and China representing a record USD12trn. In this period of uncertainty, the greatest financial relief we can give small and mid-sized businesses is faster payment of their outstanding invoices, and improved credit-management practices. The trillions tied up in receivables for small and mid-sized businesses worldwide continue to be both an impediment to growth and a major source of credit risk.

The comprehensive analysis for you here.

Digital content

A new episode of our Tomorrow Podcast aired earlier this week, the topic being the structural drivers of inflation with Andreas ‘Andy’ Jobst, Head of Macroeconomic and Capital Markets Research at Allianz, and Ano Kuhanathan, Head of Corporate Research at Allianz Trade.: Tomorrow – A podcast by Allianz Research on Apple Podcasts. Our full report on the ‘5 Ds’ at your fingertips here, in case you've missed it.

Adeel Farooqi

Economist | Machine Learning & Econometrics

1y

It was shadow banks that led to the Great Recession and now it’s the midsized banks. They always find a way to fail. Credit creation is flawed at core!

Hugue Nkoutchou

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1y

Maybe they are European pension funds which invested in both SVB and Signature Banks...

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