The banking sector has had a torrid time in the last couple of days. At times like this it can be tough to separate fact from fiction and feelings from fact. This can lead investors to make rash decisions.
What’s happening?
Swiss banking giant, Credit Suisse, has come under enormous pressure after the bank said it had “material” concerns about its accounting practices. This is only the latest scandal – the group has been under scrutiny many times before, which means markets were already raising questions.
The bank is very important to the overall global banking system. That’s why the Swiss National Bank has agreed a bail out equivalent to £44bn.
This comes after smaller US-based lenders, including Silicon Valley Bank (SVB) collapsed in recent days too. This appears to have had limited ramifications for bigger banks and the US Federal Reserve (Fed) has tools to smooth the flow of capital in the US if this is needed. But this still came as a knock to the banking system, even if wider risk is limited.
Silicon Valley Bank (SVB) collapse – what’s happened and does it matter?
What does this mean for me?
Ultimately, nerves in the market are very high. That’s why the wider banking sector has seen the valuation of listed financial companies come under strain. The UK stock market is heavily weighted towards financials which is why the FTSE 100 has fallen overall in the last few days.
But just because share prices are falling doesn’t mean it’s confirmation of a systemic issue in the sector. As things stand, issues are isolated and not a marker of incoming financial collapse. Big banks are largely very well capitalised and face very high levels of regulation, especially in the UK and EU.
All investing comes with risk though. That’s why it should be done with the long term in mind. Past performance isn’t a reliable indicator of future returns.
What should I do?
Times like these serve as a reminder of the importance of holding a diverse basket of different types of investment. Not having too much invested in one investment, sector or region can help smooth bumps in the road. That’s because higher performing areas of a portfolio pick up the slack if another area is underperforming.
It’s also important to make decisions about your investments based on research and evidence, rather than making rushed decisions. Jumping in and out of the market when things start to move can seriously damage your returns over time. Missing just a handful of the best days on the market, which have tended to happen after market falls, can be incredibly costly when looking at the long term.
Is now a good time to invest in the stock market?
There are lots of unhelpful headwinds blowing on markets these days. Higher interest rates, inflation and slowing consumer demand among them. A jumpy investor base can lead to overly severe reactions in the market – that’s what we’re seeing in banking stocks. Ultimately, we think the chances of a banking system failure are still low.
This article isn’t personal advice. If you’re not sure what’s right for you, seek advice. Investments can rise and fall in value, so you could get back less than you invest.
Article image credit: Carl Court / Getty images.