A Lesson in Liabilities - Q2 2023

A Lesson in Liabilities

It is possible that the most intense phase of the banking crisis is finished. Policymakers appear to have succeeded in putting an end to deposit runs and bank failures in recent weeks by acting swiftly to provide liquidity. Nonetheless, this is no time for complacency. The risk remains that the bank crisis will smolder for months without any spectacular failures, yet gradually create grave implications for the economy and risk assets. 

Additional highlights

• Pension Solutions Monitor: We estimate that pension funding ratios increased over the first quarter of 2023. Based on market movements, the average funding ratio is estimated to have increased from 98.3% to 100.3%.
• Fixed Income: We enter the second quarter underweight corporate credit, with a preference for higher quality segments of the market. Moreover, we caution that security selection will be paramount as the resilience of business models will be tested amidst a turbulent economic backdrop.
• Equities: It is impossible to get excited about the current equity market. It's also difficult to be disheartened by a 7% year-to-date return and solid macro economic fundamentals. On the other hand, equities still have their rivalry with policy tightening. Fortunately, the playing field has shifted a bit, and good defense may be easier to execute.
• Research: As we enter the most watched bank earnings season in a decade, we see challenges for smaller banks relative to the GSIFIs and super regionals. Banks will need to demonstrate liquidity, which they can do by increasing reserves, shortening the duration of securities holdings, issuing debt and increasing what they pay on deposits.