Bank Turmoil Poses $600 Billion Question for Battered Investors

This content was published on March 17, 2023 – 19:00March 17, 2023 – 19:004minutes

(Bloomberg) – Markets are grappling with a $600 billion question right now. Are the half-dozen banks in the spotlight outliers or a warning sign of a wider malaise in the financial sector?

Bank investors have largely been selling first and leaving that question for later. Around $600 billion dollars of market value has evaporated from the 70 biggest US and European banks since March 6, a period that’s seen the collapse of Silicon Valley Bank, Credit Suisse Group AG receive a $54 billion lifeline from the Swiss National Bank and a $30 billion Wall Street whip-round for First Republic Bank. 

A months-long bank rally is now a rout. Bank executives and analysts say that is an overreaction given the system is much better equipped to handle stress and central banks have stepped in with more than $200 billion of assistance.

“Credit Suisse has had idiosyncratic issues and I don’t think people can sensibly read across from that one particular bank to the rest of the banking sector,” NatWest Group Plc Chairman Howard Davies told Bloomberg Television on Friday. “Overall the European banking sector remains strongly capitalized and remains very liquid.”

His views were shared by Mark Dowding, chief investment officer at RBC BlueBay Asset Management, who said that while the crises at SVB and Credit Suisse may rekindle memories of the 2008 banking crash things are different this time around.

“Back at the time of the GFC, banks were much less regulated, ran excessive leverage and were poorly capitalized,” he said. “Moreover, it was credit impairment in US mortgages which acted as a catalyst that then triggered a collapse. In 2023, the banking landscape is totally different.”

Indeed, the biggest US banks — even as their share prices got hit — have been beneficiaries as customers sought a flight to safety with their deposits. And the giant firms felt confident enough to each put $5 billion of cash into First Republic. 

Investor Confidence

But others take the view that investor confidence is so shaky that contagion is a real risk and more intervention is needed — and fast.

“I am simply extremely concerned about financial contagion risk spiraling out of control and causing severe economic damage and hardship,” billionaire investor Bill Ackman tweeted on Friday. “I have said before that hours matter. We have allowed days to go by. Half measures don’t work when there is a crisis of confidence.”

Bond market veteran Anthony Peters caught the mood in his daily newsletter on Friday morning when he said that the market reaction to the last week’s events showed that some financial professionals simply did not trust in the web of post-GFC regulation to save the system.

For analysts at Jefferies, the concerns facing European banks are in “the rear-view mirror” as they pointed to the high levels of solvency and liquidity in the system. Still, they also noted “this portrait of strength can – as has been seen over the past week on both sides of the pond – also be undermined by confidence issues,” they added.

While there is little consensus around the possibility of contagion, there’s broad agreement that finance’s landscape has changed.

Recent events have many betting that central banks will pause or even reverse their upward climb. On a call with clients this week, Jason Napier, an analyst at UBS Group AG, said their assumption was that further rate rises were off the table for the time being. That will likely hit bank shares, which typically benefit in a higher interest rate environment.

And the banks at the center of the storm have already been changed utterly. Silicon Valley Bank’s former parent company has filed for bankruptcy while JPMorgan Chase & Co. analyst Kian Abouhossein said this week that a takeover of Credit Suisse by UBS is now a plausible outcome. 

(Bloomberg) –

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Talks to contain the crisis of confidence in Credit Suisse Group AG extended into Sunday, with Swiss officials and UBS Group AG racing to put together a deal to take over or break up the battered lender before markets open in Asia.

The parties are seeking to navigate thorny issues such as a government backstop and the fate of Credit Suisse’s investment bank, after UBS put aside its initial opposition to a deal with the smaller rival, people briefed on the discussions said. UBS is asking the Swiss government to take on certain legal costs and potential future losses in any takeover, said the people, with one report putting the figure at about $6 billion.

The complex discussions over what would be the first combination of two global systemically important banks since the financial crisis have seen Swiss and US authorities weigh in, some of the people said. Talks accelerated Saturday, with all sides pushing for a solution that can be executed quickly after a week that saw clients pull money and counterparties step back from some dealings with Credit Suisse. The goal is for an announcement by Sunday evening at the latest, the people said.

Under one likely scenario, the deal would involve UBS acquiring Credit Suisse to obtain its wealth and asset management units, while possibly divesting the investment banking division, the people said. Talks are ongoing on the fate of Credit Suisse’s profitable Swiss universal bank, which is likely appealing to UBS but may leave the country’s domestic banking sector too concentrated, the people said, asking not to be identified describing private discussions.

Representatives for UBS, Credit Suisse, and the Swiss finance ministry declined to comment.

A government-brokered deal would address a rout in Credit Suisse that sent shock waves across the global financial system over the past week when panicked investors dumped its shares and bonds following the collapse of several smaller US lenders. A liquidity backstop by the Swiss central bank briefly arrested the declines, but the market drama carries the risk that clients or counterparties would continue fleeing, with potential ramifications for the broader industry.

Other financial firms including Deutsche Bank AG are monitoring the situation in case attractive Credit Suisse assets go on the block either in a UBS acquisition or other form of breakup, according to people briefed on those discussions.

The discussions raise questions over the future of Credit Suisse’s bold plan to spin out its investment banking unit under the storied First Boston brand. The firm had been working to legally and operationally separate the business that would become CS First Boston, but those efforts are in nascent stages. Chief Executive Officer Ulrich Koerner has said the firm was looking at a potential initial public offering for the business in 2025.

Credit Suisse has also been shrinking its trading business, but that still carries a large chunk of the bank’s capital requirements.

“The investment bank is the bit that most people want to spin off,” said James Athey, investment director at Abrdn. “That’s likely where a lot of these exposures are. So that’s the challenge that needs addressing.”

UBS executives had been opposed to an arranged combination with its rival because they wanted to focus on their own wealth management-centric strategy and were reluctant to take on risks related to Credit Suisse, Bloomberg reported earlier. Credit Suisse has been unprofitable over the course of the last decade and has racked up billions in legal losses.

Credit Suisse had 1.2 billion Swiss francs ($1.3 billion) in legal provisions at the end of 2022 and disclosed that it saw reasonably possible losses adding another 1.2 billion francs to that total, with several lawsuits and regulatory probes outstanding, according to Bloomberg Intelligence.

Credit Suisse’s market value has plunged to about 7.4 billion Swiss francs, from a 2007 peak of more than 100 billion francs. UBS’s market value is 60 billion francs. Clients pulled more than $100 billion of assets in the final three months of last year as concerns mounted about its financial health, and the outflows have continued even after it tapped shareholders in a 4 billion franc capital raise.

Read More: Credit Suisse Weakness Disclosure Adds to Risks: Legal Outlook

A fusion between the two Swiss banking giants, whose headquarters face each other across Zurich’s central Paradeplatz square, would be an historic event for the nation and global finance.

The two banks, both counted by the Financial Stability Board as systemically relevant globally, are interlinked through frequent exchanges of executives from one side of Paradeplatz to the other. Both Chairman Axel Lehmann and CEO Koerner are former decision-makers at UBS.

Системните банкови кризи обикновено преливат в дълбоки рецесии, но финансовата система на еврозоната е в най-добрата си форма от години: капиталът, ликвидността и печалбите са на здравословни равнища. Някои икономисти посочват, че Европейската централна банка има много инструменти за борба с пазарния стрес, поради което не трябва да жертва лихвените движения, за да запази привлекателността на финансовите активи. Това мнение се прокрадва и в официалното изявление на институцията след съвещанието на управителния й съвет на 16 март (когато банкерите качиха лихвите с нови 50 базови пункта), в което се отбелязва, че тя е „напълно екипирана да предостави ликвидна подкрепа на финансовата система на блока на еврото, ако е необходимо, и да съхрани плавното приложение на паричната политика“.

ЕС ускорява работата по наредбите за фалирали банки

The US banking crisis has added urgency to EU plans for tightening rules on dealing with failing lenders, according to senior Brussels policymakers, as officials push to deliver proposals this spring. The collapse of Silicon Valley Bank in the US “underscores the importance of Europe continuing to make progress on banking union”, Paschal Donohoe, president of the Eurogroup of eurozone finance ministers, told the Financial Times. Speaking as shares in Credit Suisse fell almost 30 per cent after its leading shareholder ruled out providing the Swiss bank with more capital, Donohoe said “none of us can ever be absolutely sure about where the next risk can come from”. He said “the biggest antidote” to this risk was to speed up work on strengthening EU rules for dealing with failing lenders. Brussels has been working on draft legislation on crisis management for banks that would ensure a more consistent treatment of lenders that get into trouble, reducing the risk of drawing on public funds. The legislation was expected earlier this month, but has been delayed. Officials said they now wanted to see it presented as soon as possible following SVB’s collapse. Recommended Martin Wolf Banks are designed to fail — and they do The Eurogroup last year parked a wide-ranging plan to compete its banking union project as member states clashed over topics including the idea of a common eurozone deposit insurance scheme, deciding instead to focus on narrower ambitions to improve the regime for failing banks.  Donohoe said he was “making the case” to EU institutions and finance ministers “that now is the time to get on with that work”.  Valdis Dombrovskis, commission executive vice-president, told the FT he expected the EU’s own legislative proposal on crisis management and deposit insurance to move forward “quite soon”.  The EU’s regulatory approach had ensured its lenders were better positioned than those that failed in the US, he said, pointing out the lenders were judged too small by US regulators to fall under the global Basel III standards. “The EU is implementing Basel III in a way that these requirements apply to all banks — that provides an additional layer of safety in the prudential regulation of EU banks,” said Dombrovskis.  He added that EU banks were “in good shape with good liquidity buffers, well capitalised, so we do not expect any major spillover effects from this to the EU”. Silicon Valley Bank collapse Explore the latest news and analysis on the fallout from the failure of Silicon Valley Bank, the lender to start-ups which became the second-largest bank collapse in US history However, investors said Credit Suisse’s problems were a reminder that many European lenders – like SVB — had large holdings of bonds that have had their value hammered by rising interest rates. European bank shares fell heavily on Wednesday, as several suffered double-digit drops including BNP Paribas and Société Générale in France and Commerzbank in Germany. The US decision to rescue all depositors of SVB, including those not fully covered by deposit insurance on amounts up to $250,000, had raised important lessons for the EU as it contemplated reforms to its own regime for banking failures, officials said. They expect the reforms to the resolution framework will be controversial among member states, but aim to include tools in the regime that will allow authorities to protect uninsured depositors without tapping taxpayers — for example, by transferring the deposits to a healthy bank.