Anybody who has been following the ups and downs of the banking crisis will probably be feeling giddy by now, or worse.
The world has been forced to buckle up for another rollercoaster ride it really didn’t want, as it still hasn’t fully recovered from the 2008 global financial crisis.
The recent collapse of Silicon Valley Bank and Signature Bank in the US wiped hundreds of billions off global banking stocks.
Last Wednesday, markets suffered their biggest one-day loss since Russia invaded Ukraine in February last year, as Credit Suisse got sucked into the crisis and its shares crashed by a third.
Investors have been concerned about the Swiss bank for months, with customers pulling billions of deposits last year after it posted a $7.9 billion loss, its biggest since the global financial crisis.
Stock markets cheered when Credit Suisse rebounded on Thursday, after borrowing $54 billion from the Swiss National Bank, but this was not the end of the saga.
On Sunday, UBS, Switzerland's biggest bank, agreed to buy Credit Suisse for $3.2 billion to avoid more turmoil in global markets and creating a combined group that will have more than $5 trillion in total invested assets.
One lesson we learnt from the last financial crisis is that contagion does not happen overnight. It is a rolling process.
The global financial crisis began on August 9, 2007, when French bank BNP Paribas froze three of its funds, saying it had no way of valuing the subprime mortgages lurking inside them, known as collateralised debt obligations, or CDOs.
Regulators, central bankers and politicians assured markets they were on top of the problem, and the US S&P 500 index still ended 2007 slightly up.
On March 14, 2008, investment bank Bear Stearns went bust but JP Morgan stepped in and two months later, Hank Paulson, US treasury secretary at the time, felt able to claim that “the worst is likely to be behind us”.
It was not until September 15, 2008, that the worst turned out to be right in front of us, as US bank Lehman Brothers went bust and markets fell into a tailspin, pushing the entire financial system to the brink of collapse.
So, are we there today?
It is almost inconceivable that Credit Suisse will be allowed to collapse as Lehman did, as the fallout would be catastrophic, says Rob Burgeman, senior investment manager at wealth manager RBC Brewin Dolphin.
“So far, the authorities have shown themselves willing to take quick and decisive action to prevent contagion. This is great for depositors, but leaves shareholders in a more exposed position.”
In contrast to SVB and Signature, Credit Suisse has a robust liquidity and capital position, Mr Burgeman says. The problem is that, as is the case with every bank, it needs trust from its depositors and creditors, and it has lost that.
If this was a Lehman moment, the US Federal Reserve would have already cut interest rates but it hasn’t — yet, says Eric Vanraes, a bond portfolio manager at Eric Sturdza Investments. “Based on existing information, that is a reasonable response.”
Watch: US Federal Reserve chief warns of 'pain' in reducing inflation
The increase in interest rates as the Fed and other central bankers fight inflation is largely to blame for the current meltdown.
In theory, a higher rate should be good for banking stocks, as it allows them to widen net interest margins — the difference between what they charge borrowers and pay savers.
“Yet, in practice, it is becoming clear that the Fed cannot hike rates from zero to 5 per cent without impacting some financial players,” Mr Vanraes says.
Until recently, the Fed was expected to raise its funds rate by 50 basis points at its next meeting on Wednesday, lifting it from 4.75 per cent to 5.25 per cent.
Few expect that now. “The Fed knows that any further rate hike could trigger further bankruptcies in banks, hedge funds, pension funds and the real estate market,” Mr Vanraes says.
Central bankers are stuck between a rock and a hard place, as they juggle the twin threats of inflation and systemic financial collapse.
bond portfolio manager at Eric Sturdza Investments
So, how should investors respond?
The first lesson is do not believe everything you hear, either good or bad.
Stock markets are notoriously prone to panic. When share prices plunge, everybody believes it is the end of the world and sells, sells, sells. When shares rebound, it is suddenly the buying opportunity of a lifetime, until it isn’t.
So, when Dr Doom himself, Nobel Prize winning economist Nouriel Roubini, pops up to warn of a $1 trillion meltdown, global recession and 20 per cent house price crash, investors need to keep things in perspective.
The big hope is that the US, the UK and Europe learnt their lessons from the last financial crisis and measures taken to boost capital strength and resilience hold firm, says Joshua Mahony, senior market analyst at online trading platform IG.
“European Central Bank president Cristine Lagarde has insisted that the financial services industry is significantly more stable and better equipped than it was in 2008. Nonetheless, any gains are being made against a backdrop of significant risk and uncertainty.”
Standard financial advice is don't cut and run in a crash, as that only turns temporary “paper” losses into real ones, and will also lock your portfolio out of the recovery when it finally comes.
That advice still holds, but so does another long-standing piece of financial advice that you should only invest money in the stock market if you are unlikely to need it in the next five years, and preferably 10 years or longer.
Investors should also review their portfolios, to make sure they do not have too much exposure to high-risk areas of the market.
Brave investors will be tempted to take advantage of volatility by diving into banking stocks when they crash.
That was a losing strategy in 2007 and 2008 but finally paid off from March 2009, when central bankers slashed interest rates to the bone and unleashed quantitative easing. We are far from that point today.
Trying to time this market is as difficult as timing any other. The wisest approach may be to invest regular monthly sums to spread risk, while taking advantage of any dips in the market along the way.
We can expect plenty more of those in the bumpy months to come.
