Blackrock CEO Fink Flags Regional Bank Risk and Higher Rates

Says We Don't Know Yet If "Seizures and Shutdowns" Are Coming

Blackrock's Larry Fink at 2022 New York Times DealBook

Thos Robinson / Getty Images

BlackRock Inc. (BLK) CEO Larry Fink had a sobering warning for investors on Wednesday, suggesting that the U.S. regional banking sector was still at risk, and higher inflation and interest rates were here to stay.

Key Takeaways

  • CEO of asset management giant Blackrock has warned that the regional banking sector is still at risk.
  • Larry Fink also sees inflation remaining elevated and the Fed continuing to fight inflation.
  • Fink said asset-liability mismatches and liquidity could be the next dominoes to fall.

Asset-Liability Mismatches Could Be the Next Domnino

Fink suggested "the dominoes were starting to fall" from the era of "easy money" in his Annual Chairman's Letter to shareholders.

The first domino in his estimation is the high price of borrowing money that is currently facing businesses and individuals.

"To fight this inflation, the Federal Reserve in the past year has raised rates nearly 500 basis points," he wrote. "This is one price we’re already paying for years of easy money."

The collapse of Silicon Valley Bank and the subsequent tremors through the financial sector may be the latest domino to fall, he wrote.

"Something else had to give as the fastest pace of rate hikes since the 1980s exposed cracks in the financial system," Fink wrote.

Higher interest rates caused SVB to take a $1.8 billion loss on its bond portfolio and the company's attempts to raise capital via a share sale fell flat. Silicon Valley Bank collapsed after depositors withdrew over $40 billion in a 24-hour period from the tech lender at the news.

The Blackrock co-founder said it was still too early to assess the extent of the damage to regional banks, but he worries that it could replicate the Savings & Loans Crisis of the 1980s, which "kept on going" leading to a large number of company failures.

"We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector with more seizures and shutdowns coming," Fink wrote.

Stubborn Inflation, Higher Interest Rates and a Third Domino

Fink is the co-founder of asset management giant Blackrock, which had assets under management of $8.6 trillion as of Dec. 31.

His message for readers was that inflation would remain "elevated," and the Federal Reserve would continue to raise rates to fight inflation.

The financial system is in a stronger position than in 2008, but he that central bank fiscal tools are limited, while a "divided government" in the U.S. also adds limits to hope for swift and bipartisan agreements, he said.

Liquidity mismatches were noted as the third major risk that has yet to fall. The years of ultra-low interest rates also forced many lenders to "increase their commitments to illiquid investments—trading lower liquidity for higher returns."

This brings added risk to companies with higher leverage and Fink sees many companies reducing their lending to secure their balance sheets, while stricter capital standards are expected to be enforced by regulators.

Fink did not mention Blackrock's exposure to SVB, but a company spokesperson told Investopedia on Monday it had "limited exposure to regional banks."

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  1. Blackrock. "Annual Chairman's Letter".

  2. Silicon Valley Bank. "SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock."

  3. Blackrock. "Fourth Quarter 2022 Earnings Results".

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