J. Safra Sarasin Sustainable Asset Management

The recent turmoil in the US banking sector is a loud signal that the rapid and sharp rate increases by the Fed are impacting the monetary system. As a result, banks are becoming more risk averse and continue to tighten their lending standards. Similarly, in corporate bond markets, refinancing has become significantly more costly, even if credit risk premia have risen less than one would have expected so far. All this will negatively impact credit supply and further add to significant headwinds to an already weakening economic cycle. While the Fed wants to achieve tighter financial conditions to bring down inflation, the calibration is difficult, and, as the past few weeks have shown, not without risks to finan- cial stability.

Nevertheless, we think that the US banking system as a whole is strong enough to with- stand recent turbulences, even if smaller banks should suffer from their sizeable exposure to an ailing commercial real estate market (CRE). While the US dollar usually strengthens in times of stress, it would only sustainably reverse its recent downward trend in a finan- cial crisis scenario, which to us only is a tail risk. Finally, the euro area has so far been spared from financial sector turbulences, but bank lending standards have also tightened sharply, while loan demand will likely soften further due to sharply higher interest rates.