The relative calm and stability of January and February compared to last year was abruptly shattered by the collapse of SVB (and a less important crypto bank failure) who repeated the mistakes of previous banking disasters by borrowing short and lending long
HSBC stepped in to hoover up the UK assets but no one wanted their US interests and the domino effect of close inspection spread to the US regional banking sector as a whole, leading to First Republic losing its deposit base too, swiftly returned by the 11 largest US banks who had received it. This was an innovative way of dealing with that problem but highlights that there is a regulatory mismatch between the treatment of large globally systemic institutions and smaller regionals who rely on uninsured depositors rather than access to capital markets: a mirror image of 2008 but with specific rather than systemic risk.
In the midst of the turmoil the spotlight returned to the management basket case that is/was Credit Suisse. Their capital and liquidity ratios remained strong but in the face of their own deposit flight their SNB capital lifeline made no difference and financially suicidal comments from the head of their largest shareholder, the Saudi National Bank, ensured things unravelled with astonishing speed leading to a strong arm response from the SNB and FINMA the Swiss regulator. UBS stepped (were pushed) up to the plate, necessary as it was hard to see CS opening for business on Monday morning. Equity investors salvaged a little, in UBS shares, probably as a nod to their Middle Eastern client base but AT1’s were zeroed, all $17Bn worth. Thankfully they didn’t touch the rest of the capital stack but tremors were felt throughout the wider AT1 market and the ECB and BoE had to move quickly to reassure that in their jurisdictions common equity holders are firmly at the bottom of the heap.
The Fed made encouraging noises about the rescue/bail in as did other Central Banks. What effect this all has on the Fed’s fight against inflation remains to be seen but they have certainly inflicted some of the pain they promised. Tightening credit conditions will ensue from this episode and will have a dampening effect so terminal rates will potentially be lower. The next meeting will see if/how much they feel they can tighten in the face of ongoing volatility.
The ECB felt that they had to stick to the plan and hiked 50bp in the midst of everything which was arguably correct but their terminal rate is now also anyone’s guess. Lagarde wheeled out her ‘toolkit’ again ‘fully equipped for liquidity support’ and reassured regarding the resilience of the Euro area banking sector.
The Bank will also have a difficult decision at their forthcoming meeting and our terminal rate is also difficult to forecast now. Despite some lively Gilt market volatility Sterling actually looks quite stable in comparison to its peers, not something we have been able to say for a while. The primary market closed amidst significant spread volatility, but will reopen, and for those wondering whether the opportunity to invest in decent yields was past it has represented itself as Sterling aggregate spreads are back over 200bp.
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