The global banking system is being tested this month. Could March 2023 be the start of another stock market crash?
We've already seen the collapse of Silicon Valley Bank (SVB), though it has reportedly been sold to First Citizens.
Credit Suisse is being taken over by UBS in what seems to be an emergency deal.
Investors have now turned their attention to the troubled German bank Deutsche Bank. The Deutsche Bank share price has dropped around 25% since 9 March 2023.
We've seen large declines in some of the biggest ASX bank shares recently. For example, the Commonwealth Bank of Australia (ASX: CBA) share price has fallen 13% since 14 February this year. The Westpac Banking Corp (ASX: WBC) share price is down 11% over the same time, and the ANZ Group Holdings Ltd (ASX: ANZ) share price has dropped around 13%.
How likely is a stock market crash?
In some ways, we could say that there already has been a sell-off. Since 9 March, the S&P/ASX 200 Index (ASX: XJO) has dropped 4.8%. I wouldn't call that a crash, but it's a decent fall in just a few weeks.
However, the rest of the global share market hasn't declined like that. Banks are a sizeable presence in the global economy, but they have a bigger presence on the ASX than other markets. The S&P 500 Index (INDEXSP: .INX) is down less than 1% since 8 March 2023.
But, investors may remember the terrible impact the 2008 global financial crisis (GFC) had on the share market. In the northern hemisphere, banks collapsed, and there was a stock market crash across the global economy.
Another GFC or fallout from inflation?
ANZ CEO Shayne Elliott believes this period of instability is different to the GFC. The Australian Financial Review quoted him:
The GFC was fundamentally a crisis around the quality of assets and the loans that banks make, and that's not what the risk is here. This is a different issue. This is really to do with the global war on inflation and how central banks are raising rates very quickly in order to combat that, and that has casualties.
I can almost guarantee regulators around the world are thinking of new things they need to put in place to protect depositors and the economy from change going forward. And so there will be a whole bunch of things that we need to prepare for.
He also suggests that there's always a "casualty" in these events, though regulators and governments will try to limit the damage.
I think that governments will try to do everything they can to ensure that households and businesses aren't hurt much, even if banks do run into trouble.
My view on ASX bank shares
In my opinion, the ASX bank shares aren't in any real danger – I think they're too well capitalised to collapse.
It would be problematic if there was a cascade of sizeable bank failures in the US or Europe. I'd say that would likely cause a bear market. But, I don't think that's the most likely outcome at this stage.
It's only when lots of depositors yank their funds out of a bank that we'd see any more sizeable banks run into trouble, in my opinion. But, I think the COVID-19 pandemic period and recent weeks have shown that governments will probably do what's needed to protect the safety of the whole economic system.
But, investor jitters can send share prices down rapidly, causing a temporary stock market crash.
If there were a large decline, I'd look at past crashes like the GFC and COVID-19 to give me confidence that, at some point, share prices would likely recover. I think it's times of global economic distress that can present the best times for investors to buy shares.
