SVB files for bankruptcy
In the US, SVB Financial Group has filed for a court-supervised reorganisation under Chapter 11 bankruptcy protection to seek buyers for its assets, days after its former division Silicon Valley Bank was taken over by US regulators.
Banking shares fell more than 1.5% in pre-market trading. Regional banks were hardest hit, with PacWest Bancorp and First Republic plunging between 10% and 20%.
Credit Suisse shares are also sliding again and have fallen 12% to a daily low of 1.76 Swiss francs.
Shares in the UK subprime lender Non-Standard Finance crashed 22% to 35p after it set out plans to recapitalise itself by raising £95m through a share sale that would wipe out existing shareholders.
Its top shareholder is the British private equity firm Alchemy Special Opportunities with a 29.9% stake.
The stock has lost nearly all of its value since hitting an all-time high of 108p in 2015.
Chief executive Jono Gillespie defended the business rescue proposal.
Whilst this is, in a sense, only the end of the beginning, and significant additional work lies ahead over the coming months, the launch of the scheme is the first key step.
The business, which provides loans to people who are turned down by mainstream banks, plans to compensate customers to the tune of £14m.
European stocks have turned negative while the FTSE 100 in London is flat at 7,415. The European banking index slipped 0.4%, giving up earlier gains of 2.2%.
Here in London, HSBC shares have fallen 1.2% while Lloyds Banking Group has lost nearly 1% and Barclays is down 0.7%.
US stock futures are also in the red, pointing to a lower open on Wall Street later.
ECB holds unscheduled supervisory board meeting
The European Central Bank held an unscheduled meeting of its supervisory board this morning to discuss stress and vulnerabilities in the eurozone banking sector after the recent selloff in bank shares, a spokesperson said.
The supervisory board, which directly oversees 111 lenders in the eurozone, normally meets every three weeks but held two impromptu meetings this week because of the market turmoil. The spokesperson told Reuters:
The supervisory board is meeting to exchange views and to provide members with an update on recent developments in the banking sector.
Reuters reported, citing a source, that the purpose of the meeting was to monitor liquidity in the eurozone banking sector and watch for any vulnerability to a run on any bank, but the source did not expect the ECB to take any immediate action.
Bank stocks tumbled over the past week, spooked first by the collapse of Silicon Valley Bank and two other US bank failures. Then came the 30% selloff in Credit Suisse on Wednesday, which ended yesterday after the Swiss National Bank provided a 50 billion Swiss franc lifeline. After a 19% recovery yesterday, Credit Suisse shares are sliding again this morning.
Shares in the embattled Swiss bank are now down nearly 9%, and fell as low as 1.83 Swiss francs.
UK ‘will be only G20 economy apart from Russia to shrink this year’
The UK will be the only economy in the G20 apart from Russia to shrink this year as high inflation, the energy crisis and low productivity hinder its recovery, according to a leading international institution.
The Organisation for Economic Co-operation and Development (OECD) said all major EU economies will expand in 2023 at a stronger pace than it had forecast last year, leaving Britain and Russia the only members of the G20 group of wealthy nations to suffer a decline.
In its half-yearly outlook, the Paris-based organisation said the UK economic outlook had improved slightly compared with its forecast in November of a 0.4% contraction, largely in response to falling gas prices, but would still shrink by 0.2% this year.
There is no cause for concern about the German banking sector, according to a spokesperson for the German government.
The current situation for European banks is not comparable to the 2008 financial crisis, they said.
Credit Suisse shares fall 5.6%; suffers $205m of net outflows
Credit Suisse shares have fallen 5.6% to 1.90 Swiss francs.
As panicked clients withdrew cash, the bank had $205m net outflows from its US and European-managed funds this week, according to the data provider Morningstar.
Eurozone inflation eases to 8.5% in February
Eurozone inflation eased slightly in February while underlying price growth picked up, according to the latest official figures.
The EU’s statistics agency Eurostat confirmed preliminary data released earlier this month, saying consumer price inflation in the 20 countries sharing the euro slipped to 8.5% last month from 8.6% in January, as a big drop in energy costs was mostly offset by a price surge in nearly all other areas.
Inflation excluding volatile food and fuel prices, which is closely watched by the European Central Bank, rose to 5.6% from 5.3%. The central bank raised borrowing costs by a further 50 basis points yesterday to try and bring inflation under control and its latest projections showed underlying price growth will stay above it 2% target for years to come, through 2025.
Credit Suisse shares fell as much as 4.7% to a low of 1.90 Swiss francs.
Credit Suisse shares are selling off again and are down 4.25% at 1.93 Swiss francs.
Frédérique Carrier, head of investment strategy in the British Isles at RBC Wealth Management, explains why Credit Suisse remains too big to fail, even though the value of the bank’s assets has fallen by half since the financial crisis of 2008.
Credit Suisse is deeply integrated into the global financial system. We think it remains too big to fail, even though the value of the bank’s assets has fallen by half since the financial crisis of 2008. Switzerland’s central bank stepped in with a CHF50bn loan facility to shore up the bank’s liquidity, and offered to buy back senior debt of up to CHF3bn. This clear statement of support restored investor confidence, and banking sector share prices stabilised after the announcement. Whether depositors are sufficiently reassured to stem outflows over the next few days is a key question, in our view.
Within the European banking sector, Credit Suisse stands out due to its recent controversies and complicated restructurings. We would point out that European banks are generally well capitalised and better regulated than they were in 2008. Investor concerns are primarily focused on liquidity, i.e., whether banks have enough cash to meet demands from customers and counterparties. At this time, there is no evidence that borrowers are struggling to repay their loans, which would indicate that banks’ solvency is at risk, as it was in 2008.
While markets are relieved that the Swiss central bank stepped in, sentiment is bound to remain very fragile, particularly as investors will likely worry about the eventual economic impact of aggressive monetary policy tightening by the European Central Bank (ECB).
Despite the markets’ turmoil, the ECB opted for a well-telegraphed 50 basis point increase in interest rates to fight the region’s stubborn inflation. Its statement suggested targeted liquidity would be available should banking sector volatility persist.
Market expectations for peak interest rates in Europe have fallen markedly since the SVB failure, and now anticipate rates topping out at 3.2% by October, down from close to 4%.
Banking analysts at Jefferies – Flora Bocahut, Joseph Dickerson, Marco Nicolai and Benjie Creelan-Sandford, believe that the European banking sector is in pretty good shape overall.
Post US events last week and the CS-induced panic in European banks in markets this week, investors are once again focused on the state of European banks. Many of the concerns are in the rear-view mirror, in our view, with European banks in the strongest position they’ve been in, post great financial crisis.
We continue to be defensive in our stock picking. Go for quality, diversified, capital-rich banks with idiosyncratic catalysts ahead – HSBC, BNP Paribas, ING, [Belgian insurer] KBC Group, Lloyds Banking Group and UniCredit.
Adam Slater, lead economist at Oxford Economics, has looked at what banking crises mean for economic growth.
The failure of Silicon Valley Bank and other stresses in the global banking system have triggered a sharp repricing in financial markets, with stocks and bond yields sliding. Our baseline assumes a banking crisis will be averted. But some shift in market pricing is not surprising considering that a banking crisis – even if a tail risk – would have very serious consequences for growth.
Historically, banking crises tend to hit output hard. Upfront effects can be substantial and lasting damage is also possible – some estimates of the cut to long-term GDP are in the range 5%-10%. Even crises focused on smaller banks can have a substantial negative impact.
The channels through which banking crises affect economies include: disruption to payments, negative wealth effects, damage to output in the financial sector, and sharply tighter credit conditions for the broader economy – bank share prices are a leading indicator of bank credit standards. Fiscal clean-up costs can also add to the burden via higher long-term interest rates. Our recent modelling captures these kinds of impacts.
A notable risk area is the effect on lending to commercial property. This can be an important channel even when a banking crisis is focused on smaller banks, such as in the US savings and loans crisis and the UK’s secondary banking crisis. CRE [commercial real estate] lending could be a problem area today, too, given the already-weak trends in the sector and its concentration in smaller US banks.
The impact of banking crises can be uneven across economies, depending partly on structural factors such as the prominence of sensitive sectors. But policy matters, too. Ideally, the authorities step in early enough with effective measures to stem contagion to the wider economy. But even if contagion is not avoided, how it is then dealt with matters, as the sharp contrast in the performance of economies like Sweden and Cyprus after their banking crises shows.
Analysts at Allianz Research, led by chief economist Ludovic Subran and head of capital markets research Eric Barthalon, have looked at the US bank failures and what’s next.
The SVB failure was caused by poor risk management choices but also highlights banks’ general macro-financial challenges from restrictive monetary policy, which essentially removes diversification. Negative returns from bonds and equity put pressure on assets while quantitative tightening has led to a contraction of money supply, resulting in greater competition for deposits (as banks lend less).
Essentially, SVB was the epitome of wrong-way risk – it accepted very lumpy deposits from start-ups (which parked their venture capital funding), used related-party equity in these start-ups to collateralise loans and invested excess funds in mostly long-dated mortgage-backed securities at a time when the yield curve was inverting even more, squeezing their net interest margin. As much as central banks’ fast rate hikes to tackle inflation hit the bank’s asset side (resulting in unrealised losses that exceeded their capital base) they also caused an economic pinch for their start-up depositors, who started withdrawing their funds long before the deposit run that brought SVB to its knees.
In the wake of SVB’s failure, banks will become even more conservative in their lending. The planned resolution of the SVB imposes direct cost of other US banks, which will foot the bill for making all depositors whole (though higher FDIC fees) but, more critically; there is also an indirect effect of rising moral hazard in the banking sector as the Federal Reserve seems to be willing to still backstop failing banks. Over the near term, financing conditions are bound to tighten further in the US economy (and other countries) as banks raise lending standards and carefully safeguard their liquidity positions, further retrenching credit.
What to watch
Implications for the European banking sector – little spillover risk so far and shock absorbers are in place
Monetary policy response – rates close to peak as retrenching credit and slowing growth will do the heavy lifting to bring down inflation
Implications for markets – headed for hard landing in the blink of an eye!
Credit Suisse shares fall 4%
Credit Suisse shares shed earlier gains and fell 4% as worries about Switzerland’s second-biggest bank remain.
The shares had opened 1.8% higher in volatile trade, and are now down 3.6% at 1.95 Swiss francs. On Wednesday, they plunged to a record low of 1.55 francs and closed 25% lower.
Yesterday, the shares recovered 19% of their value after Credit Suisse secured an emergency liquidity line from the Swiss central bank. The head of Credit Suisse’s Swiss banking division, André Helfenstein, said the cash would allow the bank to carry on with its overhaul but admitted it would take time to win back client confidence.
This will not be an easy task, as Robin Wigglesworth, FT Alphaville editor, tweeted.