Newly appointed UBS CEO Sergio Ermotti (R) speaks with UBS Chairman Colm Kelleher during a press conference in Zurich on March 29, 2023.
Arnd Wiegmann | Afp | Getty Images
UBS will hold its annual general meeting on Wednesday morning against a fraught political backdrop, following its takeover of fallen rival Credit Suisse last month.
Shareholders gathering in Basel will be seeking reassurance that the board has a clear plan following the “shotgun wedding” between Switzerland’s two biggest banks, which remains mired in controversy, legal peril and public skepticism.
New CEO Sergio Ermotti will take the reins on Wednesday after his shock reappointment last week, as UBS takes on the mammoth task of integrating its fallen compatriot’s business.
Ermotti’s return was seen by many commentators as an attempt to restore calm, as the country’s long-established reputation for financial stability teeters on the line.
Concerns remain over the scale of the new entity and whether it creates too much concentrated risk for the Swiss and global economy, while reports have suggested that UBS’ plans may include job cuts of around 20-30% of the combined entity’s global workforce.
The board was angrily confronted on Tuesday by shareholders demanding answers and accountability over the 3 billion Swiss franc ($3.3 billion) deal, which was rushed through over the course of a weekend and denied both UBS and Credit Suisse shareholders a vote.
Credit Suisse Chairman Axel Lehmann said he was “truly sorry” to shareholders, clients and employees, and suggested the bank’s turnaround plan after years of losses, scandals and compliance failures had been on track until turmoil in the U.S. banking sector sparked a flight of confidence.
“We wanted to put all our energy and our efforts into turning the situation around and putting the bank back on track. It pains me that we didn’t have the time to do so, and that in that fateful week in March our plans were disrupted. For that I am truly sorry. I apologize that we were no longer able to stem the loss of trust that had accumulated over the years, and for disappointing you.
That’s Axel Lehmann, the chairman of Credit Suisse, addressing shareholders after the deal to be purchased at a cut-rate price by UBS, ending 167 years of independence. Shareholders at neither Credit Suisse CSGN, +1.39%
nor UBS UBSG, +1.20%
will get a chance to vote on the deal.
Credit Suisse shares were trading at 0.81 francs, just below the 0.84 franc per share offer the UBS bid is now worth. A year ago, Credit Suisse was worth more than 7 francs per share.
Lehmann, as noted in his speech, was not at the bank for its many scandals and trading debacles, most notably but hardly limited to the losses from the blowup of the Archegos family office and the freezing of funds tied to Greensill.
“The period from October to March was not long enough. One legacy issue after another had already seen trust eroded – and with it, patience dwindled. At that, we failed. It was too late. The bitter reality is that there wasn’t enough time for our strategy to bear fruit,” said Lehmann.
He said the deal “had to go through,” or the bank would have to restructure under Swiss banking law. “This would have led to the worst scenario, namely a total loss for shareholders, unpredictable risks for clients, severe consequences for the economy and the global financial markets,” he said.
CEO Ulrich Körner made a similar apology. “We ran out of time. This fills me with sorrow. What has happened over the past few weeks will continue to affect me personally and many others for a long time to come,” he said.
He specifically tied the collapse of SVB Financial and Signature Bank to its own demise.
A Credit Suisse Group AG bank branch in Bern, Switzerland, on Thursday, March 16, 2023.
Stefan Wermuth | Bloomberg | Getty Images
Shareholders are gathering at Credit Suisse‘s annual general meeting Tuesday to demand answers and accountability over its controversial takeover by UBS.
A police presence was established early Tuesday at the venue as shareholders began arriving in droves.
Swiss authorities brokered an emergency rescue of the stricken bank by its larger domestic rival for just 3 billion Swiss francs, over the course of a weekend in late March. It followed a collapse in Credit Suisse’s deposits and share price amid fears of a global banking crisis, but the deal remains mired in legal and logistical challenges. Neither UBS nor Credit Suisse shareholders were allowed a vote on the deal.
Commentators have highlighted the importance of the deal’s success for Swiss authorities against a febrile political backdrop. The lack of input from shareholders, bondholders and Swiss taxpayers in UBS’ acquisition of its embattled rival has sparked widespread anger.
Speaking outside the annual meeting, Vincent Kaufmann, CEO of Ethos Foundation which represents pension funds comprising between 3% and 5% of Credit Suisse shareholders, told CNBC that they had “lost a lot of money” and “need to know what management is doing.”
Potential courses of action include “trying to retrieve some of the viable pay that was granted for former management, who may have failed in their duties to protect shareholders’ interests,” he said.
“We’re still looking for possibilities — it’s quite difficult with the Swiss company law to prove the damage. Mismanagement of a company is not per se something we can concretely act against former members of the management or current members of the management, but still we need to be sure that they gave the whole truth to investors and to the market, so there is still open question,” Kaufmann told CNBC’s Joumanna Bercetche.
Holders of Credit Suisse’s AT1 bond instruments, which were subject to a $17 billion wipeout as part of the UBS takeover, last week instructed a global law firm to pursue discussion and possible litigation with Swiss authorities.
“There is still a chance that the various actors will recognize and correct the mistakes made in hastily orchestrating this merger,” Thomas Werlen, managing partner at Quinn Emanuel Urquhart & Sullivan, which is representing a “diverse array” of affected bondholders in Switzerland, the U.K. and U.S., said in a release Monday.
“While we are certainly prepared to pursue whatever proceedings are necessary, a potential constructive engagement with the relevant stakeholders could prevent years of litigation. That will be an important focus for us over the coming weeks.”
UBS announced last week that former CEO Sergio Ermotti would return to the helm of the new bank as it undertakes the huge task of integrating its fallen compatriot into its business.
UBS will hold its own AGM on Wednesday, with further clarity expected on plans for the new integrated lender. Swiss regulator FINMA will also hold a press conference on Wednesday.
Swiss newspaper Tages-Anzeiger reported Sunday, citing one source, that plans for the new entity include a 20%-30% cut to its combined global workforce.
The recent collapse of Silicon Valley Bank, Signature Bank and Credit Suisse is a harsh reminder of how quickly a trusted institution could fail, putting billions of dollars at risk. Over 550 banks have failed since 2001, according to the Federal Deposit Insurance Corp. So what exactly causes a bank to fail? And what are the broader implications on the U.S. economy?
Like any other trusted institutions, banks are capable of failing. Over 550 banks have collapsed since 2001, according to the Federal Deposit Insurance Corp.
Nonetheless, the recent collapse of Silicon Valley Bank, Signature Bank and Credit Suisse was a harsh reminder of how quickly a trusted institution could fail, putting billions of dollars at risk.
But experts say these financial disasters could have been prevented.
“Silicon Valley Bank’s failure could and should have been prevented by better regulation and supervision by the Federal Reserve,” said Aaron Klein, a senior fellow of economic studies at the Brookings Institution. “The Federal Reserve needed to be the one saying, ‘Wait a second, you have some serious interest rate risk that you need to hedge against.’ And they failed [to do that].”
Experts say the focus should be on ensuring that the rules are being enforced.
“As recently as 2019 and more recently even, there were warnings that things needed to be changed here, that they’re taking on additional interest rate risk, and that they’re going to have some potential liquidity problems in the event that interest rates begin to rise,” said William T. Chittenden, an associate professor of finance and economics at Texas State University.
The collapse of SVB also revealed the danger of deregulation. Several politicians and researchers have pointed to the rollback of Dodd-Frank regulations by the Trump administration as one of the main reasons for the bank’s failure.
“What happened in Dodd-Frank was they said that all banks over $50 billion would be subject to enhanced prudential standards,” explained Klein. “The rollback said nobody’s subject to that between $50 billion and $100 billion, and between $100 billion and $250 billion, it is optional.”
“SVB happened to fall in that category of between $50 billion and $250 billion so when they raised that, they weren’t subject to this great scrutiny,” said Chittenden.
Watch the video to find out more about why banks fail in the U.S.
BRUSSELS — European regulators distanced themselves from the Swiss decision to wipe out $17 billion of Credit Suisse‘s bonds in the wake of the bank’s rescue, saying they would write down shareholders’ investments first.
Dominique Laboureix, chair of the EU’s Single Resolution Board, had a clear message for investors in an exclusive interview with CNBC.
related investing news
“In [a banking] resolution here, in the European context, we would follow the hierarchy, and we wanted to tell it very clearly to the investors, to avoid to be misunderstood: we have no choice but to respect this hierarchy,” Laboureix said Wednesday.
It comes after Swiss regulator FINMA announced earlier this month that Credit Suisse’s additional tier-one (AT1) bonds, widely regarded as relatively risky investments, would be written down to zero, while stock investors would receive over $3 billion as part of the bank’s takeover by UBS, angering bondholders.
In a joint statement with the ECB Banking Supervision and the European Banking Authority, the Single Resolution Board said on March 20 that the “common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down.”
The standard hierarchy or framework sees equity investments classed as secondary to bonds when a bank is rescued.
Switzerland’s second largest bank Credit Suisse is seen here next to a Swiss flag in downtown Geneva.
Fabrice Coffrini | AFP | Getty Images
“As a resolution authority in charge of the banking union resolution framework, I can tell you that I will respect fully and entirely the legal framework. So in resolution, when adopting a resolution scheme, I will respect this hierarchy starting by absorbing equity stack, and then the AT1 and then the Tier 2 and then the rest,” Laboureix said.
Switzerland is not part of the European Union and so does not fall under the region’s banking regulation.
The Single Resolution Board became operational in 2015 in the wake of the Global Financial Crisis and sovereign debt crisis. Its main function is to ensure that there’s the least possible impact on the real economy if a bank fails in the euro zone.
The recent banking turmoil started in the U.S. with the fall of Silvergate Capital, a bank focused on cryptocurrency. Shortly after, regulators closed Silicon Valley Bank and then Signature Bank following significant deposit outflows in an effort to prevent contagion across the sector.
For regulators in the euro zone, the collapse of Silicon Valley Bank, and perhaps subsequent events, could have been avoided if tougher banking rules were in place.
“A bank like this would have been under strict rules,” Laboureix said. “I’m not judging … but what I understand is that these mid-sized banks, so-called mid-sized banks in the U.S., were in reality, big banks compared to ours in the banking union.”
European lawmakers have previously told CNBC that U.S. regulators made mistakes in preventing the failure of SVB and others.
One of the key differences between the U.S. and Europe is that the former has a more relaxed set of capital rules for smaller banks.
Basel III, for instance — a set of reforms that strengthens the supervision and risk management of banks and has been developed since 2008 — applies to most European banks. But American lenders with a balance sheet below $250 billion do not have to follow them.
Despite the recent turbulence, European regulators argue the sector is strong and resilient, particularly because of the level of controls introduced since the Global Financial Crisis.
“If you look at the past events — I mean, Covid, Archegoes, Greensill, the Gilt crisis in the U.K. last September, etc, etc — during the three last years, the resilience of the European banking system was very strong based on very good solvency and very good liquidity and a very good profitability,” Laboureix said.
“I really believe that yes, there is a good resiliency in our banking system. That does not mean that we don’t have to be vigilant.”
A new Senate Finance Committee report from the Democratic staff alleges that Credit Suisse CS violated key terms of a plea agreement with the Justice Department. The report alleges Credit Suisse transferred nearly $100 million of funds from a family of dual U.S.-Latin American citizens to other banks in Switzerland without notifying the DOJ, enabling what “appears to be potentially criminal tax evasion” for almost a decade, the report says. Several additional Swiss banks may be currently holding large secret offshore accounts for U.S. persons, the report says. Credit Suisse has agreed to be purchased by UBS UBS with the…
Credit Suisse, the collapsed Swiss bank taken over by UBS Group in a hastily arranged bailout earlier this month, may bring with it a fresh set of regulatory and legal problems for its new owner.
For years, the bank has provided a safe haven for wealthy American clients to hide assets from the IRS — even after it was caught and prosecuted for doing the same thing more than a decade ago, according two former Credit Suisse bankers who spoke in exclusive interviews with CNBC and are working with the U.S. government as whistleblowers.
The bank notoriously pleaded guilty in 2014 to criminal charges for “knowingly and willfully” helping thousands of U.S. clients conceal their offshore assets and income from the IRS. It admitted at the time that it used sham entities, destroyed account records, and hand delivered cash to American clients to avert IRS detection — agreeing to crack down on U.S. tax dodgers going forward as part of its plea deal. Credit Suisse also agreed at the time to a host of reforms, including disclosing its cross-border activities and cooperating with authorities when they request information, among other things.
The now troubled bank appears to have violated that agreement, according to a new report by the Senate Finance Committee that details ongoing and rampant abuse since then. The report, released Wednesday, details the findings of the panel’s two-year investigation and takes on more urgency given the looming banking crisis. The Swiss National Bank, the country’s central bank, injected more than $100 billion of liquidity into Credit Suisse to keep it afloat earlier this month, while the Swiss government agreed to provide UBS with some $9 billion to backstop losses resulting from the takeover.
Senate investigators say the new revelations raise questions about just how much American money remains hidden inside the vaults of a bank whose collapse rattled the foundations of the global banking system.
The Senate report, which was prepared by the panel’s Democratic staff, accuses the bank of violating the terms of its 2014 plea agreement, which could trigger a host of repercussions if the Justice Department presses the case. It is unclear how much potential liability UBS is exposed to as a result of the report, but a lawyer for the whistleblowers argues the bank should pay as much as $1.3 billion.
Senate Finance Committee Chairman Ron Wyden, D-Ore., said his committee had received new information just this week from Credit Suisse about additional American undisclosed accounts that the bank held after 2014.
“It is still going on as of just the last couple of days — even more money has been found to have been concealed and there are very substantial issues here,” Wyden said. “Clearly, it’s time to prosecute and ensure that there are penalties that send a strong message.”
“Credit Suisse employees aided and abetted a major criminal tax evasion scheme,” a finance committee aide said, asking not to be named because the report had not been released yet. “To date, no Credit Suisse employees involved in the scheme have faced any consequences from the United States government for their participation.”
Senate investigators say they discovered that Credit Suisse enabled as many as 25 American families to hide fortunes totaling more than $700 million in the bank in the years after Credit Suisse’s plea agreement.
“They thought they could get away with it, and they largely did,” the aide said. “It’s not a question of whether Swiss banks continue to do this, it’s a question of which Swiss banks still do this.”
In a statement to CNBC, a Credit Suisse spokeswoman said it does not tolerate tax evasion.
“In its core, the report describes legacy issues, some from a decade ago, and we have implemented extensive enhancements since then to root out individuals who seek to conceal assets from tax authorities,” the spokeswoman said, asking not to be identified because she was not authorized to speak on the record. She said the bank’s new leadership team has been cooperating with the committee. Credit Suisse has “supported the work of Senator Wyden, including in respect of suggested policy solutions to help strengthen the financial industry’s ability to detect undisclosed US persons.” She said the bank’s policy requires it to close undeclared accounts when they’re identified and discipline employees who don’t follow its policy.
A sign of Credit Suisse bank is seen at their headquarters in Zurich on March 20, 2023.
Fabrice Coffrini | AFP | Getty Images
The two former Credit Suisse employees, who worked as whistleblowers with the U.S. government and Senate investigators, told CNBC some of the bad behavior continued long after Credit Suisse’s 2014 plea agreement. CNBC agreed to mask their identities on camera and to maintain their anonymity because they say they fear retaliation from the bank. They were interviewed in the weeks before Credit Suisse collapsed earlier this month.
Although the bank did disclose and close many American accounts after its 2014 plea agreement, some bankers worked with high net worth clients to keep certain Americans at the bank, by changing the nationalities listed on their accounts and ignoring evidence that the account holders were Americans. In other cases, they helped American clients move money to other banks, without reporting those transfers to U.S. authorities, the whistleblowers say.
The report and interviews offer a rare look at the inner workings of the secretive Swiss banking, a world rarely penetrated by outsiders. And they show how compliance systems inside Credit Suisse broke down in the years before its collapse this month and rescue by the Swiss government and rival bank UBS.
Bankers are under constant pressure, the whistleblowers said, to keep and bring in deposits at the bank.
“You’re under tremendous pressure to bring in these net new assets, which ultimately translate into revenue,” the first whistleblower said in describing a culture where bankers were expected to keep the assets of wealthy clients inside the bank, even if they had to cheat to do it. “And that’s the reason for the fraud. You don’t want to lose assets. So, what you do is you try to maintain them in any way, shape, or form.”
Senior executives would call out individual bankers at quarterly meetings where they would read out the asset numbers for each banker. If a banker’s number declined, the second whistleblower said, “you’d get exposed in front of your colleagues.” And as a result, he said, “there may come moments where people simply omit saying things.”
“‘Don’t Ask, Don’t Tell’ is maybe a good explanation to what happened,” he said. “They would have clients that are Americans, but they would switch their passports around to show and flag as if they are not.”
Credit Suisse bankers, for instance, repeatedly flew to Miami to meet with American clients and yet failed to flag them as U.S. citizens, Senate investigators said.
Secrecy drives the entire Swiss banking industry, the first whistleblower said – to a point that the sector may not be able to survive without it.
“Swiss banks are much more expensive, and there’s a reason for that,” he said. “If you could choose anywhere in the world you want to be, why would you pay more? Why would you be in a place which underperforms in terms of your return on assets?”
If a client isn’t hiding assets in Switzerland, the first whistleblower said, “there’s no other reason to be there.”
Emails obtained by the Senate Finance committee show just how far the bankers went to keep identities secret and to ensure wealthy Americans were able to switch nationalities — at least for the bank’s internal record-keeping.
In one email, one of Credit Suisse’s banker writes to another bank employee, “please don’t write or document these topics.”
One American client, an heir to a $200 million fortune deposited at Credit Suisse, emailed to say they renounced their U.S. citizenship.
“I tried to reach you, congratulation!!!!!” their private banker emailed back. “This is a big step for you and I know it was not easy.”
The heir to the fortune replied, “Thanks … hopefully this should also make Credit Suisse now more relaxed.”
“The committee’s investigation uncovered major violations of Credit Suisse’s plea agreement, including an ongoing and potentially criminal tax conspiracy involving nearly $100 million dollars and undeclared offshore accounts belonging to a family of dual U.S./Latin American citizens,” a committee aide told CNBC.
The aide said Credit Suisse closed accounts held by that family worth nearly $100 million in 2013 and moved funds to other banks in Switzerland and elsewhere, but did not inform U.S. authorities about the transfer of assets until 2021 – which was months after whistleblowers informed U.S. authorities of the existence of the accounts.
In the Senate report the clients are not named, but simply referred to as “The Family.”
While it’s legal for Americans to hold funds in foreign bank accounts, they must file forms with the IRS disclosing the assets and pay taxes on any relevant gains. Americans must file a disclosure document called a Report of Foreign Bank and Financial Accounts, which is referred to in the industry as an “FBAR.”
The committee said the family held assets at Credit Suisse dating as far back as 1979, and they found evidence Credit Suisse bankers visited members in the family in Miami as early as 2000, holding meetings at the Mandarin Oriental hotel and enjoying meals at the Capital Grille restaurant in Miami’s fashionable Brickell neighborhood overlooking Biscayne Bay.
But aides say they didn’t find any evidence the family ever filed required paperwork with the U.S. government or paid taxes on their assets. Instead, the assets were held under one family member’s dual Latin American passport.
As a result, the aide said, “They’re potentially in legal jeopardy, to put it mildly.”
Committee aides say the family’s assets were overseen by a high-level Credit Suisse executive in its Latin American division, and that official participated in the meetings in Miami. That’s notable, aides said, because that same official was the supervisor of several other Credit Suisse bankers who were previously indicted in connection with the 2014 American offshore accounts.
Committee aides complained that Credit Suisse declined to provide the names of any of the employees involved or the Swiss banks that received the funds – but said they were able to determine that information through other sources.
The Miami case “is not small potatoes,” a Senate aide said. If proven, it “would be one of the largest FBAR violations in United States history.”
Former Justice Department prosecutor Jeffrey Neiman, who is representing the whistleblowers, said he believes fraud is still ongoing and the DOJ should claw back hundreds of millions of dollars in fines that the bank agreed to pay in 2014, but ultimately didn’t have to pay. The bank agreed to pay $2.6 billion, but a federal judge only imposed a penalty of $1.3 billion at the time.
“I think Credit Suisse is aware of Americans who are still hiding money today. And I think the bank is doing whatever it can to contain whatever this damage is,” Neiman said.
“At a minimum, the U.S. government needs to collect that $1.3 billion for the American taxpayers. This bank needs to be made an example of,” he said. “We hear tough talk out of the Justice Department about holding repeat corporate offenders accountable. Let’s see if those words have actual meaning.”
The whistleblowers stand to gain financially if there are further payments to the U.S. government. Under the law, whistleblowers stand to collect between 15% and 30% of any money recovered by the U.S. government as a direct result of information they provide.
The Senate Finance Committee doesn’t think U.S. prosecutors have gone far enough in holding Credit Suisse accountable, the aide said. The report is part of a campaign to up the pressure on the DOJ to crack down on the Swiss bank, and the recent takeover of the bank puts it squarely in the spotlight.
“DOJ must correct its lax oversight of Credit Suisse and hold Credit Suisse accountable for any violations of its plea agreement,” he said.
The aide cited recent indications of a white-collar crackdown. “DOJ said we will go after anybody at banks who commits tax evasion,” the aide said. “Then do it. We’re going to drop you twelve names in this report. Go after them.”
The Justice Department declined to comment when contacted for this story.
It’s not clear what liability, if any, UBS assumed for all this as a result of its emergency government-brokered takeover of Credit Suisse on March 19. It is also not clear how much of this potential legal overhang was disclosed to UBS before its acquisition of Credit Suisse, although a source familiar with Credit Suisse’s thinking said UBS officials are aware of the situation.
Officials at UBS did not respond to a request for comment for this story.
A person familiar with Credit Suisse’s thinking told CNBC that it is “disquieting” for the Senate Finance Committee to release its report even as global regulators are trying to shore up the global banking system by facilitating the sale of Credit Suisse to UBS. “The financial services sector and its importance to the world economy has become blatantly obvious to everyone,” the person said.
When asked if he could say for certain that there are no undeclared American dollars in the bank today, the person said: “I don’t believe there is anything there that could be described in this way. Now, you can never say never.” He said Credit Suisse has investigated and not found any more illicit accounts. “I don’t believe there is anything there.”
— CNBC’s Bria Cousins contributed to this article.
It is “unlikely” that European banks will undergo anything as serious as in 2008, according to economists.
Peter Macdiarmid / Staff / Getty Images
LONDON — Turbulence across the banking sector has prompted the question of whether we are teetering on the edge of another financial crash, 2008-style. But a banking crisis today would look very different from 15 years ago thanks to social media, online banking, and huge shifts in regulation.
This is “the first bank crisis of the Twitter generation,” Paul Donovan, chief economist at UBS Global Wealth Management, told CNBC earlier this month, in reference to the collapse of Credit Suisse.
“What social media has done is increase the importance of reputation, perhaps exponentially, and that’s part of this problem I think,” Donavan added.
Social media gives “more scope for damaging rumours to spread” compared to 2008, Jon Danielsson, director of the Systemic Risk Centre at the London School of Economics, told CNBC in an email.
“The increased use of the Internet and social media, digital banking and the like, all work to make the financial system more fragile than it otherwise would be,” Danielsson said.
Social media not only allows rumors to spread more easily, but also much faster.
“It’s a complete gamechanger,” Jane Fraser, Citi CEO, said at an event hosted by The Economic Club of Washington, D.C., last week.
“There are a couple of tweets and then this thing [the collapse of Silicon Valley Bank] went down much faster than has happened in history,” Fraser added.
While information can spread within seconds, money can now be withdrawn just as quickly. Mobile banking has changed the fundamental behavior of bank users, as well as the optics of a financial collapse.
“There were no queues outside banks in the way there were with Northern Rock in the U.K. back in [the financial crisis] — that didn’t happen this time — because you just go online and click a couple of buttons and off you go,” Paul Donavan told CNBC.
This combination of quick information dissemination and access to funds can make banks more vulnerable, according to Stefan Legge, head of tax and trade policy at the University of St. Gallen’s IFF Institute for Financial Studies.
“While back in the day, the view of people lining up in front of bank branches caused panic, today we have social media … In a way, bank runs can happen much faster today,” Legge told CNBC in an email.
Stronger balance sheets
The European Union made huge efforts to shore up the zone’s economic situation in the aftermath of the financial crisis, including the founding of new financial oversight institutions and implementing stress testing to try to foresee any difficult scenarios and prevent market meltdown.
Risk in the banking system today is significantly less than it has been at any time over the last 20 or 30 years.
Bob Parker
Senior Advisor at International Capital Markets Association
This makes it “unlikely” that European banks will undergo anything as serious as in 2008, Danielsson told CNBC.
“[Bank] funding is more stable, the regulators are much more attuned to the dangers and the capital levels are higher,” Danielsson said.
Today banks are expected to have much more capital as a buffer, and a good metric for measuring the difference between today’s financial situation and 2008 is bank leverage ratios, Bob Parker, senior advisor at International Capital Markets Association, told CNBC’s “Squawk Box Europe” last week.
“If you actually look at the top 30 or 40 global banks … leverage is low, liquidity is high. Risk in the banking system today is significantly less than it has been at any time over the last 20 or 30 years,” Parker said.
The European Banking Authority, which was founded in 2011 in response to the financial crisis as part of the European System of Financial Supervision, highlighted this in a statement about the Swiss authorities stepping in to help Credit Suisse.
“The European banking sector is resilient, with robust levels of capital and liquidity,” the statement said.
Individual players can still run into difficulties however, no matter how resilient the sector is as a whole.
Parker described this as “pockets of quite serious problems” rather than issues that are ingrained across the entire industry.
“I actually don’t buy the argument that we have major systemic risk building up in the banking system,” he told CNBC.
Fraser made similar observations when comparing the current banking system with what happened in 2008.
“This isn’t like it was last time, this is not a credit crisis,” Fraser said. “This is a situation where it’s a few banks that have some problems, and it’s better to make sure we nip that in the bud.”
One parallel between the 2008 crisis and the current financial scene is the importance of confidence, with “a lack of trust” having played a big part in the recent European banking turmoil, according to Thomas Jordan, chairman of the Swiss National Bank.
“I do not believe that [mobile banking] was the source of the problem. I think it was a lack of trust, of confidence in different banks, and that then contributed to this situation,” Jordan said at a press conference Thursday.
If trust is lost, then anything can happen.
Stefano Ramelli
Assistant professor in corporate finance at the University of St. Gallen
Even as banks have enhanced their capital and liquidity positions, and improved regulation and supervision, “failures and lack of confidence” can still occur, José Manuel Campa, the chairperson of the European Banking Authority, said last week.
“We need to remain vigilant and not be complacent,” Campa told the European Parliament during a discussion on the collapse of Silicon Valley Bank.
Trust and confidence in the system is a “fundamental law of finance,” according to Stefano Ramelli, assistant professor in corporate finance at the University of St. Gallen.
“The most important capital for banks is the trust of depositors and investors. If trust is lost, then anything can happen,” Ramelli said.
In the wake of recent market volatility and steep share price falls, Morgan Stanley cautioned that the European banking sector is “not as attractive as it was.” On Friday, Deutsche Bank shares fell as concerns about the stability of European banks persisted after the forced acquisition of embattled Credit Suisse by its rival UBS . The German lender’s shares retreated for a third consecutive day and have now lost more than a fifth of their value this month. Morgan Stanley strategists cautioned that although the banking sector is now cheaper, news flow surrounding earnings upgrades and cash return expectations may fade or reverse. They also suggest that the cyclical window for European banks had closed — and investors should reduce exposure to the sector. “While we don’t know yet exactly how things will play out for financials from here, we are confident that the economic outlook has deteriorated and that the window for ongoing good/improving macro data is beginning to close,” said Morgan Stanley’s strategists led by Graham Secker. “We are reluctant to downgrade the sector just here as we see scope for volatility to emerge on the upside as well as the downside … however, we see further uncertainty ahead and would look to reduce exposure into any material rally,” the team added, also telling clients that “banks will be volatile up and down – we would sell into rallies.” The report highlights that every rate hiking cycle over the past 70 years has ended in a recession or a financial crisis, with the current turmoil proving no exception. Although financial crises do not always lead to recessions, the odds are unfavorable given recent events, such as tightening credit availability and a deeply inverted yield curve, according to the strategists. The gap between the 2-year and 10-year yields reached 110 basis points on the day before the Silicon Valley Bank meltdown but now stands at just 34 basis points. According to Morgan Stanley, this steepening after the failure of SVB Financial , Silvergate and Signature Bank in the U.S. and forced takeover of Credit Suisse signals an impending slowdown. On a top-down basis, Morgan Stanley recommended the following overweight-rated (a buy equivalent rating) stocks to navigate this environment with a defensive exposure. Stocks in traditionally defensive sectors, such as health care and utilities, are being recommended by Morgan Stanley. They are Swisscom , KPN , Novo Nordisk , Ahold , and SSE , among others. Citi bank has also downgraded the European banking sector . Strategists at the Wall Street bank said investors should focus on technology as the market faces increased tail risks due to concerns about the flow of credit at the major lenders. The banking concerns have also impacted the case for European equities outperforming their U.S. counterparts. Previously, European equities were expected to outperform due to a potential U.S. economic slowdown or a Fed-induced sell-off in the S & P 500. However, Morgan Stanley said the banking sector’s problems have shifted this perspective, as the outperformance of European banks has been closely tied to the broader European market. — CNBC’s Michael Bloom contributed reporting
A Deutsche Bank AG branch in the financial district of Frankfurt, Germany, on Friday, May 6, 2022.
Alex Kraus | Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Deutsche Bank is the latest bank to suffer a panic-driven sell-off. But analysts said it’s an irrational move by markets.
Deutsche Bank sank 8.22% Friday amid a sudden spike in the cost of insuring against its default. But it’s unlikely the German bank — which has had 10 straight quarters of profit and strong solvency and liquidity positions — will go down as Credit Suisse did, analysts said.
U.S. markets edged higher Friday, shrugging off renewed fears of the banking crisis spreading in Europe. But Europe’s Stoxx 600 closed 1.4% lower, weighed down by a 3.8% drop in banks. Deutsche Bank aside, Societe Generale lost 6.13%, Barclays tumbled 4.21% and BNP Paribas dropped5.27%.
International Monetary Fund chief Kristalina Georgieva said recent bank collapses have increased risks to financial stability. But China’s economic rebound may boost the world economy, Georgieva added. Every 1 percentage point increase in China’s GDP adds 0.3 percentage point in the GDP of other Asian economies, according to IMF estimates.
PRO Several important economic data points will be released this week: personal consumption expenditures, consumer sentiment and home sales. But concerns about the banking system will likely dominate markets and cause continued volatility.
Now that central banks worldwide have made their interest rate decisions, markets are turning their attention back to the banking sector. In today’s heightened atmosphere, however, prudence can quickly — and arbitrarily — tip over into paranoia.
Deutsche Bank appears to be the latest victim of the market’s panic. On Friday, after the price of its credit default swaps rose to its highest since 2018, investors sparked a sell-off in the German bank.
The move is mostly irrational, according to analysts. Deutsche Bank is not another Credit Suisse in two key aspects.
First, have a look at their fourth-quarter reports. Deutsche Bank reported a 1.8-billion-euro ($1.98 billion) net profit, giving it an annual net income for 2022 of 5 billion euros. By contrast, Credit Suisse had a fourth-quarter loss of 1.4 billion Swiss francs ($1.51 billion), bringing it to a full-year loss of 7.3 billion Swiss francs. The difference between the two European banks couldn’t be starker.
Second, Deutsche Bank’s liquidity coverage ratio was 142% at the end of 2022, meaning the bank had more than enough liquid assets to cover a sudden outflow of cash for 30 days. On the other hand, Credit Suisse disclosed it had to use “liquidity buffers” in 2022 as the Swiss bank fell below regulatory requirements of liquidity.
Research firm Autonomous, a subsidiary of AllianceBernstein, was so confident in Deutsche Bank that it issued a research note stating: “We have no concerns about Deutsche’s viability or asset marks. To be crystal clear — Deutsche is NOT the next Credit Suisse.”
While the Deutsche Bank episode reverberated through Europe markets, U.S. investors seemed less concerned. In fact, the SPDR S&P Regional Banking ETF gained 3.03% on Friday. Major indexes also rose — not just for the day, but the week. The Dow Jones Industrial Average inched up 0.41%, giving it a 0.4% week-over-week gain. The S&P 500 rose 0.56%, contributing to a 1.4% weekly increase. The Nasdaq Composite added 0.3% to finish the week 1.6% higher.
It’s an impressive showing given market volatility. Unfortunately, there’s no promise of stability this week. The personal consumption expenditure price index — the inflation reading most important to the Fed — will come out Friday, and it’s “going to be sticky,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. But the banking crisis will continue gripping markets so tightly that they might not care about inflation as much — for better or worse.
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First Republic Bank headquarters is seen on March 16, 2023 in San Francisco, California, United States.
Tayfun Coskun | Anadolu Agency | Getty Images
The surge of deposits moving from smaller banks to big institutions including JPMorgan Chase and Wells Fargo amid fears over the stability of regional lenders has slowed to a trickle in recent days, CNBC has learned.
Uncertainty caused by the collapse of Silicon Valley Bank earlier this month triggered outflows and plunging share prices at peers including First Republic and PacWest.
The situation, which roiled markets globally and forced U.S. regulators to intervene to protect bank customers, began improving around March 16, according to people with knowledge of inflows at top institutions. That’s when 11 of the biggest American banks banded together to inject $30 billion into First Republic, essentially returning some of the deposits they’d gained recently.
“The people who panicked got out right away,” said the person. “If you haven’t made up your mind by now, you are probably staying where you are.”
The development gives regulators and bankers breathing room to address strains in the U.S. financial system that emerged after the collapse of SVB, the go-to bank for venture capital investors and their companies. Its implosion happened with dizzying speed this month, turbocharged by social media and the ease of online banking, in an event that’s likely to impact the financial world for years to come.
Within days of its March 10 seizure, another specialty lender Signature Bank was shuttered, and regulators tapped emergency powers to backstop all customers of the two banks. Ripples from this event reached around the world, and a week later Swiss regulators forced a long-rumored merger between UBS and Credit Suisse to help shore up confidence in European banks.
The dynamic has put big banks like JPMorgan and Goldman Sachs in the awkward position of playing multiple roles simultaneously in this crisis. Big banks are advising smaller ones while participating in steps to renew confidence in the system and prop up ailing lenders like First Republic, all while gaining billions of dollars in deposits and being in the position of potentially bidding on assets as they come up for sale.
The broad sweep of those money flows are apparent in Federal Reserve data released Friday, a delayed snapshot of deposits as of March 15. While large banks appeared to gain deposits at the expense of smaller ones, the filings don’t capture outflows from SVB because it was in the same big-bank category as the companies that gained its dollars.
Although inflows into one top institution have slowed to a “trickle,” the situation is fluid and could change if concerns about other banks arise, said one person, who declined to be identified speaking before the release of financial figures next month. JPMorgan will kick off bank earnings season on April 14.
At another large lender, this one based on the West Coast, inflows only slowed in recent days, according to another person with knowledge of the matter.
JPMorgan, Bank of America, Citigroup and Wells Fargo representatives declined to comment for this article.
The moves mirror what one newer player has seen as well, according to Brex co-founder Henrique Dubugras. His startup, which caters to other VC-backed growth companies, has seen a surge of new deposits and accounts after the SVB collapse.
“Things have calmed down for sure,” Dubugras told CNBC in a phone interview. “There’s been a lot of ins and outs, but people are still putting money into the big banks.”
The post-SVB playbook, he said, is for startups to keep three to six months of cash at regional banks or new entrants like Brex, while parking the rest at one of the four biggest players. That approach combines the service and features of smaller lenders with the perceived safety of too-big-to-fail banks for the bulk of their money, he said.
“A lot of founders opened an account at a Big Four bank, moved a lot of money there, and now they’re remembering why they didn’t do that in the first place,” he said. The biggest banks haven’t historically catered to risky startups, which was the domain of specialty lenders like SVB.
Dubugras said that JPMorgan, the biggest U.S. bank by assets, was the largest single gainer of deposits among lenders this month, in part because VCs have flocked to the bank. That belief has been supported by anecdotal reports.
For now, attention has turned to First Republic, which has teetered in recent weeks and whose shares have lost 90% this month. The bank is known for its success in catering to wealthy customers on the East and West coasts.
Regulators and banks have already put together a remarkable series of measures to try to save the bank, mostly as a kind of firewall against another round of panic that would swallow more lenders and strain the financial system. Behind the scenes, regulators believe the deposit situation at First Republic has stabilized, Bloomberg reported Saturday.
First Republic has hired JPMorgan and Lazard as advisors to come up with a solution, which could involve finding more capital to remain independent or a sale to a more stable bank, said people with knowledge of the matter.
If those fail, there is the risk that regulators would have to seize the bank, similar to what happened to SVB and Signature, they said. A First Republic spokesman declined comment.
While the deposit flight from smaller banks has slowed, the past few weeks have exposed a glaring weakness in how some have managed their balance sheets. These companies were caught flat-footed as the Fed engaged in its most aggressive rate hiking campaign in decades, leaving them with unrealized losses on bond holdings. Bond prices fall as interest rates rise.
It’s likely other institutions will face upheaval in the coming weeks, Citigroup CEO Jane Fraser said during an interview on Wednesday.
“There could well be some smaller institutions that have similar issues in terms of their being caught without managing balance sheets as ably as others,” Fraser said. “We certainly hope there will be fewer rather than more.”
Germany’s Chancellor Olaf Scholz said Deutsche Bank is profitable after shares dipped more than 10% during European trading.
Ludovic Marin | Afp | Getty Images
BRUSSELS — European leaders on Friday were keen to stress that the region’s banking sector was stable and sound following Deutsche Bank‘s sudden slide as markets opened for trade.
German Chancellor Olaf Scholz told reporters at an EU summit that Deutsche Bank is a profitable business with no reasons for concern.
The German lender “has modernized, organized the way it works. It is a very profitable bank and there is no reason to be concerned,” he said, according to a translation.
Shares of the German lender traded more than 14% lower at one point Friday after a Thursday evening surge for its credit default swaps — a type of contract to insure against a default. This comes just days after the emergency rescue of Credit Suisse and the collapse of Silicon Valley Bank as well as several measures from authorities stateside to avoid contagion across the financial sector.
French President Emmanuel Macron also told reporters in Brussels that the banking system is solid, while European Central Bank President Christine Lagarde said the euro area is resilient because it has strong capital and solid liquidity positions.
“The euro area banking sector is strong because we have applied the regulatory reforms agreed internationally after the Global Financial Crisis to all of them,” she said, according to EU sources.
The 27 EU leaders were gathered for their usual end of quarter meeting. Geopolitics dominated the first day of talks, but the banking turmoil ended up being the focus for Friday. This became the case, in particular, as the leaders’ conversations developed in parallel to the sharp sell-off in Deutsche Bank shares.
In the run up to the gathering, European officials had expressed their frustration with the lack of regulatory controls in the United States, where the recent banking turmoil first emerged. They have been nervous about potential contagion to their own banking sector, mainly as it’s not been that long since European banks were in the depths of the global financial crisis.
“The banking sector in Europe is much stronger, because we have been through the financial crisis,” Estonia Prime Minister Kaja Kallas told CNBC Thursday.
In the wake of the 2008 shock, European banks underwent massive restructuring and had to significantly shore up their balance sheets.
But the EU is still somewhat vulnerable to shocks given that it has a monetary union within the euro area, where 20 nations share the euro, but lacks a fiscal union. Fiscal policy is still the responsibility of the individual governments rather than one single institution.
“We need to progress on completing the banking union; further work is also necessary to create a truly European capital markets,” Lagarde also told the 27 EU heads of state on Friday.
The banking union is a set of laws introduced in 2014 to make European banks more robust. The debate has been politically sensitive, but the reality that high interest rates are here to stay has made it even more pressing.
The idea for a true capital markets union is to make lending easier across the region, where often national bureaucracy can differ from country to country.
A logo stands on display above the headquarters of Deutsche Bank AG at the Aurora Business Park in Moscow, Russia.
Andrey Rudakov | Bloomberg | Getty Images
Deutsche Bank shares fell by more than 9% in early trade on Friday following a spike in credit default swaps on Thursday night, as concerns about the stability of European banks persisted.
The German lender’s shares retreated for a third consecutive day and have now lost more than a fifth of their value so far this month. Credit default swaps — a form of insurance for a company’s bondholders against its default — leapt to 173 basis points on Thursday night from 142 basis points the previous day.
Deutsche Bank’s additional tier one (AT1) bonds — an asset class that hit the headlines this week after the controversial writedown of Credit Suisse’s AT1s as part of its rescue deal — also sold off sharply.
Financial regulators and governments have taken action in recent weeks to contain the risk of contagion from the problems exposed at individual lenders, and Moody’s said in a note Wednesday that they should “broadly succeed” in doing so.
“However, in an uncertain economic environment and with investor confidence remaining fragile, there is a risk that policymakers will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector,” the ratings agency’s credit strategy team said.
“Even before bank stress became evident, we had expected global credit conditions to continue to weaken in 2023 as a result of significantly higher interest rates and lower growth, including recessions in some countries.”
Moody’s suggested that, as central banks continue their efforts to reel in inflation, the longer that financial conditions remain tight, the greater the risk that “stresses spread beyond the banking sector, unleashing greater financial and economic damage.”
It should be noted that Deutsche Bank’s 5-year credit-default swap, which was 215 on Friday, is nowhere near the peak for Credit Suisse, which was 1,194, according to S&P Global data. The higher the value of the CDS, the more likely the market sees the issuer defaulting.
Deutsche Bank’s AT1 bonds have tumbled in value after Switzerland wiped out Credit Suisse’s CSGN, -5.19%
securities in the deal for it to be taken over by UBS UBSG, -3.55%.
The Invesco AT1 Capital Bond UCITS ETF AT1, -1.97%,
which invests in these convertible bonds, has dropped 18% this month as investors lose faith in the securities. European and other banking regulators across the globe have insisted they will not follow Switzerland’s precedent, and first let bank equity fall to zero before wiping out the convertible securities in the event of a failure.
“It is doubtful that banks will be able to issue new AT1 anytime soon, increasing the likelihood of outstanding AT1 notes being extended. We consider that the recent events in the banking sector have resulted in substantially increased uncertainty, which is likely to continue to be reflected as substantial short-term volatility in credit markets,” said analysts at ING.
UBS UBS, -0.94%
also is feeling the stress in a deal that the banks say might not complete this year. UBS shares dropped 6%.
Analysts also noted that a foreign institution tapped a Fed facility for $60 billion, according to data released by the U.S. central bank on Thursday. The Fed does not identify the counterparties. Major central banks do have access to swap lines for dollar borrowing from the Fed, meaning that either it was an institution that does not have that capability, or it was one that wanted to do so anonymously.
WASHINGTON — The Federal Reserve on Wednesday enacted a quarter percentage point interest rate increase, expressing caution about the recent banking crisis and indicating that hikes are nearing an end.
Along with its ninth hike since March 2022, the rate-setting Federal Open Market Committee noted that future increases are not assured and will depend largely on incoming data.
“The Committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC’s post-meeting statement said. “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
That wording is a departure from previous statements which indicated “ongoing increases” would be appropriate to bring down inflation. Stocks fell during Fed Chair Jerome Powell’s news conference. Some took Powell’s comments to mean that the central bank may be nearing the end of its rate hiking cycle, though he qualified that to say that the inflation fight isn’t over.
“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” the central bank leader said at his post-meeting news conference.
However, Powell acknowledged that the events in the banking system were likely to result in tighter credit conditions.
The softening tone in the central bank’s prepared statement came amid a banking crisis that has raised concerns about the system’s stability. The statement noted the likely impact from recent events.
“The U.S. banking system is sound and resilient,” the committee said. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”
During the press conference, Powell said the FOMC considered a pause in rate hikes in light of the banking crisis, but ultimately unanimously approved the decision to raise rates due to intermediate data on inflation and the strength of the labor market.
“We are committed to restoring price stability and all of the evidence says that the public has confidence that we will do so, that will bring inflation down to 2% over time. It is important that we sustain that confidence with our actions, as well as our words,” Powell said.
The increase takes the benchmark federal funds rate to a target range between 4.75%-5%. The rate sets what banks charge each other for overnight lending but feeds through to a multitude of consumer debt like mortgages, auto loans and credit cards.
Projections released along with the rate decision point to a peak rate of 5.1%, unchanged from the last estimate in December and indicative that a majority of officials expect only one more rate hike ahead.
Data released along with the statement shows that seven of the 18 Fed officials who submitted estimates for the “dot plot” see rates going higher than the 5.1% “terminal rate.”
The next two years’ worth of projections also showed considerable disagreement among members, reflected in a wide dispersion among the “dots.” Still, the median of the estimates points to a 0.8 percentage point reduction in rates in 2024 and 1.2 percentage points worth of cuts in 2025.
The statement eliminated all references to the impact of Russia’s invasion of Ukraine.
Markets had been closely watching the decision, which came with a higher degree of uncertainty than is typical for Fed moves.
Jerome Powell, chairman of the US Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, on Wednesday, March 22, 2023.
Al Drago | Bloomberg | Getty Images
Earlier this month, Powell had indicated that the central bank may have to take a more aggressive path to tame inflation. But a fast-moving banking crisis thwarted any notion of a more hawkish move – and contributed to a general market sentiment that the Fed will be cutting rates before the year comes to a close.
Estimates released Wednesday of where Federal Open Market Committee members see rates, inflation, unemployment and gross domestic product underscored the uncertainty for the policy path.
Officials also tweaked their economic projections. They slightly increased their expectations for inflation, with a 3.3% rate pegged for this year, compared to 3.1% in December. Unemployment was lowered a notch to 4.5%, while the outlook for GDP nudged down to 0.4%.
The estimates for the next two years were little changed, except the GDP projection in 2024 came down to 1.2% from 1.6% in December.
The forecasts come amid a volatile backdrop.
Despite the banking turmoil and volatile expectations around monetary policy, markets have held their ground. The Dow Jones Industrial Average is up some 2% over the past week, though the 10-year Treasury yield has risen about 20 basis points, or 0.2 percentage points, during the same period.
While late-2022 data had pointed to some softening in inflation, recent reports have been less encouraging.
The personal consumption expenditures price index, a favorite inflation gauge for the Fed, rose 0.6% in January and was up 5.4% from a year ago – 4.7% when stripping out food and energy. That’s well above the central bank’s 2% target, and the data prompted Powell on March 7 to warn that interest rates likely would rise more than expected.
But the banking issues have complicated the decision-making calculus as the Fed’s pace of tightening has contributed to liquidity problems.
While big banks are considered well-capitalized, smaller institutions have faced liquidity crunches due to the rapidly rising interest rates that have made otherwise safe long-term investments lose value. Silicon Valley, for instance, had to sell bonds at a loss, triggering a crisis of confidence.
The Fed and other regulators stepped in with emergency measures that seem to have stemmed immediate funding concerns, but worries linger over how deep the damage is among regional banks.
At the same, recession concerns persist as the rate increases work their way through the economic plumbing.
An indicator that the New York Fed produces using the spread between 3-month and 10-year Treasurys put the chance of a contraction in the next 12 months at about 55% as of the end of February. The yield curve inversion has increased since then.
However, the Atlanta Fed’s GDP tracker puts first-quarter growth at 3.2%. Consumers continue to spend – though credit card usage is on the rise – and unemployment was at 3.6% while payroll growth has been brisk.
General view of First Republic Bank in Century City on March 17, 2023 in Century City, California.
AaronP/Bauer-Griffin | GC Images | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
UBS’ planned takeover of Credit Suisse calmed the market slightly. Broader market conditions, however, still look unstable.
U.S. markets staged a relief rally as all major indexes made minor gains Monday. Asia-Pacific markets rose on Tuesday too. South Korea’s Kospi added 0.42% as the country’s producer price index for February increased 4.8% year on year, a slight decline from the previous month.
Japan’s Prime Minister Fumio Kishida is on his way to Ukraine for a surprise visit to Ukraine’s President Volodymyr Zelenskyy, Japan’s Ministry of Foreign Affairs confirmed. Kishida’s unexpected trip overlaps with Chinese leader Xi Jinping’s official state visit to Ukraine’s nemesis, Russia and its leader Vladimir Putin.
The “Minsky moment,” named after the economist Hyman Minsky, is a sudden collapse of the market after a long period of aggressive speculation brought on by easy money. Markets might face a Minsky moment soon, warned Marko Kolanovic, JPMorgan Chase’s chief market strategist and co-head of global research.
Markets haven’t collapsed. Some bank stocks are in the doldrums, yes, but the SPDR S&P Regional Banking ETF, a fund of regional bank stocks, rose 1.11% on Monday. Major indexes were up yesterday too. The Dow Jones Industrial Average gained 1.2%, the S&P 500 added 0.89% and the Nasdaq Composite increased 0.39%.
But there are signs market instability is increasing. The banking crisis is causing regional banks — which account for around a third of all lending in the United States — to reduce their loans, said Eric Diton, president and managing director of The Wealth Alliance. In other words, the availability of money in the economy is slowing even without the Federal Reserve increasing interest rates.
Speaking of interest rates, analysts seem to think there’s no good path forward for the Fed. An interest rate hike “would be a mistake,” MKM Partners Chief Economist Michael Darda told CNBC. On the other hand, a pause would cause “panicked reactions by equity and bond investors,” according to Nationwide’s Mark Hackett. This suggests markets are already so jittery that whatever the Fed does — even if it’s nothing — it might cause instability to spread.
With that in mind, investors might want to heed Kolanovic’s warning that a Minsky moment could be on the horizon.
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A potential crisis in the global banking sector may have been averted over the weekend, as Swiss authorities stepped in to broker a deal for UBS to acquire embattled Credit Suisse . But stock markets are not out of woods yet, according to Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer. He believes contagion fears around the banking sector are just one of several risk factors afflicting stocks, and predicts the market will remain “fat and flat” in the near term. “Even if markets rebound from current levels in the short term, high uncertainty and lowered confidence levels are likely to mean an ongoing ‘fat & flat’ market given that valuations do not look particularly attractive,” Oppenheimer wrote in a note on Mar. 17, ahead of the announcement of the Credit Suisse rescue deal. This valuation problem is down to two reasons, according to Oppenheimer. “The first is that the U.S. equity market, long a significant outperformer, remains expensive relative to history and relative to real rates. Despite cheaper valuations outside of the U.S. – a key factor in recent outperformance – other markets are unlikely to de-couple in any U.S.-led correction,” he said. The second reason is that there is now a much higher hurdle for stocks to beat, according to Oppenheimer, with other assets looking more appealing. He said U.S. stocks continue to look stretched and offer “very little return,” while cash and short-duration debt looks “very attractive” relative to stocks. Heading into the next Federal Open Market Committee meeting on Tuesday, Oppenheimer believes even an interest rate cut would not provide a meaningful boost for equities. He noted that U.S. stocks delivered about twice their usual returns after the first rate cut, but almost no return three months after. “Twelve months after the first cut, returns tend to be positive but below average. The poorer returns are largely a reflection of weaker growth. This is why equities often do better when rates are rising,” he said. How to trade it Despite uncertainty in the European banking sector, Oppenheimer believes European stocks will continue to outperform their U.S. peers. He said Europe’s outperformance has been a result of improved relative fundamentals, positive inflows, and cheaper valuations. “In the meantime, we continue to like companies with strong balance sheets and stable margins. Among the more defensive parts of the markets, we are overweight Healthcare. in both the US and Europe. We would also focus on income strategies such as dividends and buybacks,” Oppenheimer added. Outside of stocks, he is also overweight cash in his global asset allocation, given greater uncertainty about the near-term path for corporate profits.
The Swiss regulator on Sunday announced that it was writing the value of Credit Suisse’s additional Tier 1 bonds — also called AT1 bonds, or contingent convertible bonds or CoCos — down to zero, as part of the bank’s merger with UBS.
The news has spooked investors of the AT1 market, which is valued at about $275 billion.
But what are Cocos and why should you care? Here’s what you need to know:
CoCos, or contingent convertible capital instruments, to give them their full name, are hybrid capital instruments that are structured to absorb losses in times of stress. They were introduced after the 2008 financial crisis to help steer risk away from taxpayers and onto bondholders.
They are bonds that automatically convert into equity—shares in the bank—when a bank’s capital falls below a certain threshold.
If a bank is functioning normally, investors are paid a coupon, just like any bondholder. But if things go wrong, the bank can “bail in” the CoCo investor, converting debt into shares in what would then be a troubled lender.
European banks liked to issue CoCos, because they are counted as additional Tier 1 capital. They’re a way for banks to improve their capital ratios, as required under rules put in place after the crisis, without issuing more shares.
U.S. banks don’t issue CoCos—they use a different type of preferred stock to boost their Tier 1 capital. But U.S. investors have been buyers of CoCos for the extra yield they have offered. That’s risky because the instruments can be converted to low-value shares, or entirely wiped out as has now happed with those issued by Credit Suisse CSGN, -55.74%
CoCos are perpetual bonds, or bonds that have no set maturity date. They can be redeemed if a bank exercises an option to do so, typically after a five-year period. But regulators may block banks from redeeming them, if the cost of issuing replacement debt is much higher. And if a bank becomes highly stressed like Credit Suisse, they can simply be written off.
A call for Credit Suisse bondholders is expected to take place on March 22, according to law firm Quinn Emanuel Urquhart & Sullivan, which said on Monday it is exploring potential legal actions on behalf of AT1 bondholders.
The surprise for some investors on Monday is that the Swiss move has wiped out the bondholders but not the shareholders, even though bondholders typically rank above equity holders in capital structure.
Not the Credit Suisse CoCos, which were structured to allow for the Swiss regulatory move.
Under the terms of the deal with UBS, Credit Suisse shareholders will be able to exchange their shares for about 0.70 francs, which is below where the stock closed Friday, but more than the bondholders will receive.
Most of the demand for CoCos in recent years has come from private banks and retail investors, especially in Europe and Asia, along with big U.S. institutional investors who were attracted by the higher yields in the low-interest-rate environment that prevailed from the crisis until the Federal Reserve started raising interest rates last year.
To be sure, the Credit Suisse CoCos were showing signs of stress last week as the bank became more embroiled in crisis. The bank’s 9.75% coupon CoCo bonds due June of 2028 were trading at an average price of 36 cents on the dollar last Wednesday, as MarketWatch’s Joy Wiltermuth reported.
Now fund managers say investors are likely to avoid them, undermining their use for banks.
“The UBS-CS deal might have avoided an immediate risk event, but the AT1 write down has added an uncertainty which could persist for weeks if not months,” said Mohit Kumar, chief financial economist in Europe at Jefferies.
“Given the large amount of AT1s outstanding, this would also raise the prospect of losses for other investors and the ability of banks to use them as a funding source in the future,” he added.
The logos of Swiss banks Credit Suisse and UBS on March 16, 2023 in Zurich, Switzerland.
Arnd Wiegmann | Getty Images News | Getty Images
Shares of Credit Suisse and UBS led losses on the pan-European Stoxx 600 index on Monday morning, shortly after the latter secured a 3 billion Swiss franc ($3.2 billion) “emergency rescue” of its embattled domestic rival.
Credit Suisse shares collapsed by 60% at around 11:20 a.m. London time (7:20 a.m. ET), while UBS traded 5% lower.
Europe’s banking index was down nearly 1.8% around the same time, with lenders including ING, Societe Generale and Barclays all falling over 2.7%.
The declines come shortly after UBS agreed to buy Credit Suisse as part of a cut-price deal in an effort to stem the risk of contagion to the global banking system.
The size of Credit Suisse was a concern for the banking system, as was its global footprint given its multiple international subsidiaries. The 167-year-old bank’s balance sheet is around twice the size of Lehman Brothers’ when it collapsed, at about 530 billion Swiss francs at the end of last year.
The combined bank will be a massive lender, with more than $5 trillion in total invested assets and “sustainable value opportunities,” UBS said in a release late Sunday.
The bank’s chairman, Colm Kelleher, said the acquisition was “attractive” for UBS shareholders but clarified that “as far as Credit Suisse is concerned, this is an emergency rescue.”
“We have structured a transaction which will preserve the value left in the business while limiting our downside exposure,” he added in a statement. “Acquiring Credit Suisse’s capabilities in wealth, asset management and Swiss universal banking will augment UBS’s strategy of growing its capital-light businesses.”
Neil Shearing, group chief economist at Capital Economics, said a complete takeover of Credit Suisse may have been the best way to end doubts about its viability as a business, but the “devil will be in the details” of the UBS buyout agreement.
“One issue is that the reported price of $3,25bn (CHF0.5 per share) equates to ~4% of book value, and about 10% of Credit Suisse’s market value at the start of the year,” he highlighted in a note Monday.
“This suggests that a substantial part of Credit Suisse’s $570bn assets may be either impaired or perceived as being at risk of becoming impaired. This could set in train renewed jitters about the health of banks.”
