Conning ConnText Podcast: Regional Banks Add to Economic Challenges Due to Rising Interest Rates, Potential Legislation and Real Estate Holdings
May 01, 2023
Bankers Sharpen Focus on Managing Duration Gap
HARTFORD, CT – May 1, 2023 —Leading global investment management firm Conning has posted its latest Conning ConnText quarterly podcast, which discusses the impact of recent regional bank failures on the economy. While 2023 already had an exhaustive list of economic challenges, the recent struggles in the banking sector have only added to the pressure.
Rich Sega, Conning’s Global Chief Investment Strategist and host of the podcast, said that the U.S. Federal Reserve’s drive to raise interest rates to fight inflation has also uncovered issues in some bank portfolios. “Silicon Valley Bank was a unique regional bank due to its tech sector depositor base and start-up focused lending philosophy,” Sega said. “Its exposure to unrealized bond losses, however, is not unique in the industry and that’s why contagion was a threat.”
“Managing the ‘duration gap,’ something insurers are acutely focused on as a matter of course, now has the attention of every banker in the country,” Sega added.
Will the banking concerns lead to a recession? Indicators such as credit spreads and corporate profits are not at typical pre-recession levels, Sega said. But should we experience a short and mild recession, he sees an earnings recovery in consumer sectors in the early part of next year, with opportunities in U.S. dollar equities and longer-dated bonds
Matt Daly, Head of Conning’s Corporate and Municipal Teams, explained that one positive during the current banking challenges has been the industry’s relative strength.
“We had record revenues last year driven by net interest income, historically low loan losses and strong regulatory capital levels,” Daly said. “Nonetheless, we expect volatility to persist as banks navigate rising deposit costs and perhaps more complex and stringent regulatory backdrops.”
“We also expect higher loan loss provisions driven by concerns within commercial real estate lending and the subprime consumer areas,” he said.
More banking regulation would likely lead to higher costs and earning pressures and possible further industry consolidation, Daly added, but that in turn could be positive for creditworthiness. “We could see larger, well capitalized organizations that are more heavily regulated,” he said.
To subscribe to the Conning ConnText podcast, click here.
Conning (www.conning.com) is a leading investment management firm with over $201 billion in global assets under management as of March 31, 2023.* With a long history of serving the insurance industry, Conning supports institutional investors, including insurers and pension plans, with investment solutions, risk modeling software, and industry research. Founded in 1912, Conning has investment centers in Asia, Europe and North America.
*As of March 31, 2023, represents the combined global assets under management for the affiliated firms under Conning Holdings Limited and Cathay Securities Investment Trust Co., Ltd. (“SITE”). SITE reports internally into Conning Asia Pacific Limited but is a separate legal entity under Cathay Financial Holding Co., Ltd. which is the ultimate controlling parent of all Conning Holdings Limited controlled entities.
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