(Corrects typographical error in seventh paragraph)
By Ross Kerber
(Reuters) - BlackRock Inc (NYSE:BLK) Chief Executive Laurence Fink warned on Wednesday the U.S. regional banking sector remains at risk after the collapse of Silicon Valley Bank and that inflation will persist and rates would continue to rise.
In an annual letter, Fink described the current financial situation as the "price of easy money" after the Federal Reserve had to hike rates nearly 500 basis points to fight inflation, and that he expects more Fed rate increases.
Fink wrote that after the regional banking crisis, the financial industry could see what he termed "liquidity mismatches." That is because the low rates have driven some asset owners to raise their exposure to higher-yielding investments that are not easy to sell.
“Bond markets were down 15% last year, but it still seemed, as they say in those old Western movies, ‘quiet, too quiet,’” Fink said in his letter, which was seen by Reuters. “Something else had to give as the fastest pace of rate hikes since the 1980s exposed cracks in the financial system."
Fink said that quick regulatory action helped stave off a wider crisis. He wrote that he expects a more divided world will interrupt supply chains and make inflation persistent and "more likely to stay closer to 3.5% or 4% in the next few years."
COMBINED MESSAGE
Fink's annual letters to CEOs and investors, traditionally sent in January, have become a touchstone for corporate leaders as the New York firm he co-founded grew into the world's largest asset manager. It had $8.6 trillion under management as of Dec. 31.
This year Fink combined both letters into one wide-ranging, 20-page document touching on everything from the benefits of working in-person to his affinity for the 1980s pop music band Talk Talk.
He did not directly address the often-personal criticism he has received from U.S. Republicans who say BlackRock has put too much attention on environmental, social and governance (ESG) issues.
But he cited what he called the "once unthinkable figure" of $120 billion that insurers had to cover for natural catastrophes in 2022, which he said showed why climate risk amounts to investment risk.
He added that is "why BlackRock has been so vocal in recent years in advocating for disclosures and asking questions about how companies plan to navigate the energy transition," although it is not BlackRock's place to tell companies what to do.
MARKETS ON EDGE
Fink said it was not clear yet whether the banking crisis precipitated by rising interest rates would claim more victims, but it seemed inevitable that some banks will now pull back on lending to shore up their balance sheets.
That will lead bank clients to turn more to capital markets for their financing in the face of what Fink called the "asset-liability mismatches" that doomed Silicon Valley Bank and several smaller institutions.
“It’s too early to know how widespread the damage is,” Fink wrote. “The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge.”
He did not refer to BlackRock's own exposure to the regional banks. Reuters reported this week that, based on Morningstar data, mutual funds managed by BlackRock and some others appear to be among the most exposed to the collapse of Silicon Valley Bank and Signature Bank (NASDAQ:SBNY). BlackRock has previously said its diversified products "have limited exposure to Silicon Valley Bank."
High interest rates will also limit government's spending, so business and government leaders must work together, Fink said.
"The monetary and fiscal tools available to policymakers and regulators to address the current crisis are limited, especially with a divided government in the United States," Fink wrote.
Yet, North America could be one of the biggest beneficiaries of global tensions, given its large and diverse labor force, natural resources and technology investments, he said.
(This story has been refiled to fix a typographical error in paragraph 7)