The bank failures have opened up Pandora's box, and the huge hole in banks' balance sheets isn't going away, strategist says

NYSE trader worried
A trader reacts as he works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 18, 2020.Lucas Jackson/Reuters
  • The recent banking failures have opened up a Pandora's box, TD strategist Priya Misra warned.

  • The gaping hole in banks' balance sheets will remain even as volatility fades, she said.

  • That's putting the US at greater risk for a downturn, which could weigh on equities.

The recent bank failures have opened up a Pandora's box, as the huge hole in banks' balance sheets isn't going away, according to TD Securities' strategist Priya Misra.

In an interview with Bloomberg TV on Thursday, she pointed to the fallout from Silicon Valley Bank, whose failure sparked a steep sell-off in bank stocks over the past few weeks.

Though some of the market volatility from SVB has faded away, capital stresses haven't, Misra said, as assets in banks' portfolios have lost significant value.

"I think you opened a Pandora's box and massive unrealized losses sitting on banks' balance sheets," she said, adding that banks would likely need to sell their assets or raise capital. "That's going to impact lending standards."

Tighter lending and credit conditions will naturally slow down the economy, which spells trouble amid the current economic backdrop. Experts had already been warning over the last year that the Fed risked overtightening the economy into a recession, as central bankers aggressively hiked interest rates in order to control inflation.

The fed funds rate is now 4.75-5%, the highest since 2007. SVB's collapse has only added to that tightening, meaning banking turmoil has raised the risk of recession, economists say.

Additionally, the pool of consumer savings that had been buffering the economy is also shrinking, Misra said, placing the US in a more vulnerable position for a downturn.

But the Fed has signaled rates will stay high throughout the year, as inflation is still elevated. And Misra added that policymakers are unlikely to cut interest rates until tighter lending conditions begin to appear in the economic data.

"The market will have to get used to a Fed that's not being responsive enough," Misra warned. "This is absolutely going to result in a hard landing, it's just when that happens and when the Fed can respond."

Other Wall Street analysts have warned of a recession to strike this year, which could weigh heavily on stocks. Legendary investor Jeremy Grantham predicted a steep recession that could cause stocks to plunge 50%, and Wall Street's "Dr. Doom" economist Nouriel Roubini warned of a financial crisis that could send the S&P 500 crashing 30%.

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