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Tag: SVB collapse

  • Europe’s central bank hikes rates by 50 bps despite bank chaos

    Europe’s central bank hikes rates by 50 bps despite bank chaos

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    The European Central Bank has carried through with a large interest rate increase Thursday, brushing aside predictions it might dial back as US bank collapses and troubles at Credit Suisse fed fears about the impact of higher rates on the global banking system.

    The ECB hiked rates by half a percentage point Thursday, underlining its determination to fight high inflation.

    In a post-meeting statement, the bank called the banking sector in the 20 countries using the euro currency “resilient,” with strong finances.

    Explained: Why the fall of Silicon Valley Bank matters to India
         Explained: Why the fall of Silicon Valley Bank matters to India
     

    It says it’s “monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”

    ECB head Christine Lagarde said last week that it was “very likely” the bank would raise its benchmarks by a half-percentage point, part of a series of rapid rate hikes aimed at getting inflation down from 8.5 per cent — far above the bank’s target of 2 per cent.

    That was before Silicon Valley Bank in the US went under last week after suffering losses on government-backed bonds that fell in value due to rising interest rates.

    Then, globally connected Swiss bank Credit Suisse saw its shares plunge this week and had to turn to the Swiss central bank for emergency credit.

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  • Credit Suisse sinks, fuelling $60 billion rout in European Banks

    Credit Suisse sinks, fuelling $60 billion rout in European Banks

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    Credit Suisse Group AG shares plunged and credit default swaps were near a distressed level after its biggest shareholder ruled out any additional support. 

    Saudi National Bank Chairman Ammar Al Khudairy said “absolutely not” in response to a question on Wednesday about whether the bank was open to further injections if there was another call for additional liquidity.

    The comments sent Credit Suisse shares down 20 per cent in the biggest one-day selloff on record. Traders were seeing prices of as high as 1,200 basis points on one-year senior credit-default swaps on Wednesday morning, according to two people who saw the quotes and asked not to be named. The last recorded quote on pricing source CMAQ stood at 835.9 basis points on Tuesday. 

    The panic selling spread to European banks and dragged US stock futures lower. Two-year yields on German bunds fell 33 basis points, in a further sign of flight to safety. 

    Also read: World markets set for aftershocks as SVB collapse ripples out

    A gauge for the European banking sector declined 7 per cent, reaching the lowest since early January, and BNP Paribas SA sank 11 per cent. The combined market value lost among European banks was more than $60 billion on Wednesday.

    “Markets are very sensitive to the negative news flow after the surprise of seeing a US bank disappear from one day to the other,” said Francois Lavier, head of financial debt strategies at Lazard Freres Gestion. “In a context where market sentiment is already weakened, not much is needed to weaken it even further.” 

    Credit Suisse is just months into a complex turnaround plan that will see the Swiss firm spin out the investment banking unit while focusing on its key wealth management business. That effort risks being further complicated by market unease across financials after the collapse of multiple US regional banks. 

    Also read: How SVB and Signature Bank failed so quickly — and why the US banking crisis still persists

    A spokesperson at Credit Suisse declined to comment when contacted by Bloomberg News. Chief Executive Officer Ulrich Koerner said in a Bloomberg Television interview on Tuesday that business momentum improved this quarter and that the bank attracted funds after the collapse of SVB.

    Shares of large US lenders sank in premarket trading. Bank of America Corp. fell as much as 3.9 per cent and Wells Fargo & Co. dropped 4 per cent. Citigroup Inc. shares declined 3.8 per cent

    In the credit market, spreads of more than 1,000 basis points in one-year senior bank CDS are extremely rare. Major Greek banks traded at similar levels during the country’s debt crisis and economic slump. The level recorded on Tuesday is about 18 times the contract for a rival Swiss bank, UBS Group AG, and about nine times the equivalent for Deutsche Bank AG.

    Also read: Biden promises ‘whatever needed’ for U.S. bank system as SVB shock hammers stocks

    The CDS curve is also deeply inverted for the bank, meaning that it costs more to protect against an immediate failure, instead of a default further down the line. The lender’s CDS curve had a normal upward slope as recently as Friday. Traders typically ascribe a higher cost of protection over longer, more uncertain periods.

    “When we have this kind of material risk, it takes some time for calm to come back to markets,” said Frederic Dodard, head of asset allocation at State Street Global Advisors Ltd. “We could continue to see market swings for a few days, especially with central banks meetings this week and next week. They could help restore confidence or even worsen it. We’re not out of the woods yet.”

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  • No serious implication on Indian financial system due to Silicon Valley Bank failure, says Government

    No serious implication on Indian financial system due to Silicon Valley Bank failure, says Government

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    The Government does not see any ‘serious’ impact on the overall Indian financial system due to the breakdown of Silicon Valley Bank (SVB). However, it does acknowledge that stock market and start-up ecosystem may face some heat.

    “We do not see any serious implication on our financial system due to development in the US,” a senior Government official told businessline. While he did not explain it further, two reasons could be attributed for this deduction – the first is that there is a much-improved regulatory mechanism for banks and financial system in India and the second is the unique business model of the said bank that was less dependent on retail deposits than a traditional bank.

    Also read: Lehman moment? Trading in First Republic, Signature Bank, other regional banks halted after SVB collapse

    California-based Silicon Valley Bank (SVB), the 16th largest bank in the United States, was closed on March 10 by the Financial Protection and Innovation, which later appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver. The FDIC, in a statement, said as of December 31, 2022, the Silicon Valley Bank had approximately $209 billion in total assets and about $175.4 billion in total deposits. At the time of closing on March 10, the amounts of deposits in excess of the insurance limits were undetermined. Start-up-focused lender, SVB Financial Group, has become the largest bank to fail since the 2008 financial crisis.

    Meanwhile, the official, quoted above, mentioned that SVB development combined with the decision from the next Federal Reserve meeting will impact the sentiments in the stock market. “Aggressive rate hike by Federal Reserve being seen as a key reason for SVB problem. So, it would be important to see what is the next move of the Federal Reserve,” he said. One of eight regularly scheduled meetings in a calendar year of the Federal Open Market Committee (FOMC) is to take place on March 21-22 with the summary of Economic Projections.

    Also read: Union Minister Rajeev Chandrasekhar to meet Indian start-ups over impact of SVB collapse 

    The official said that since the move by the Federal Reserve impacts yield on the bond, it impacts the sentiments in the stock market, which is already in a bull phase. On Friday, March 10, Sensex and Nifty slipped more than 1 per cent due to heavy selling in IT, financial, and oil stocks in line with a weak trend in the global markets.

    The official also felt that Indian start-ups may face the heat as many analysts feel that there could be difficulty in making various kinds of payments. It is said that as almost every third start-up in Silicon Valley is founded by Indian-Americans, there is apprehension that many of these founders would be impacted coming days in terms of even making basic payments and giving paychecks to their employees.

    Also read: SVB shutdown sends shockwaves through Silicon Valley as CEOs race to make payroll

    Over the past several years, SVB has been one of the most preferred choices of banking for start-ups and the tech industry in Silicon Valley, mainly because of its understanding of the industry and flexibility in many aspects suiting the start-up ecosystem. At the same time, a large number of Indian start-ups, which do not have even an employee or an office in the US, had opened up their accounts in SVB as it let them do so without much regulatory questions and with a customer-friendly approach.

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  • SVB collapse a sign of pain coming from end of easy-cash era

    SVB collapse a sign of pain coming from end of easy-cash era

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    The easy-cash era is over, and its impact is only just starting to be felt by world markets yet to see the end of the sharpest interest rate hiking cycle in decades.

    Risks were brought to the fore this week as U.S. tech specialist Silicon Valley Bank was shut by California banking regulators on Friday, sparking a rout in bank stocks. SVB was seeking funds to offset a hit on a $21 billion bond portfolio, a result of surging rates, as customers withdrew deposits.

    Central banks, meanwhile, are shrinking their balance sheets by offloading bond holdings as part of their fight against hot inflation.

    We look at some potential pressure points.

    BANKS

    Banks have shot up the worry list as the SVB rout hit bank stocks globally on contagion fears. European banks slid on Friday after JPMorgan and BofA shares fell over 5 per cent.

    SVB’s troubles stemmed from deposit outflows as clients in the tech and healthcare sectors struggled to raise cash elsewhere, raising questions over whether other banks would have to cover deposit outflows with loss-making bond sales too.

    In February, U.S. regulators said U.S. banks had unrealised losses of more than $620 billion on securities, underscoring the hit from rising interest rates.

    Germany’s Commerzbank issued a rare statement playing down any threat from SVB.

    For now, analysts saw SVB’s issues as idiosyncratic and took comfort from safer business models at larger banks. BofA noted European banks’ bond holdings have not grown since 2015.

    “Normally speaking, banks would not be taking big duration bets with deposits, but with such rapid rate rises it is clear why investors could be worried and are selling now and asking questions later,” said Gary Kirk, partner at TwentyFour Asset Management.

    Read also: Ghost of contagion after Silicon Valley Bank woes haunts markets

    DARLINGS NO MORE

    Even after a first-quarter surge in stock prices, higher rates have dampened the willingness to take punts on early-stage or speculative businesses, especially as established tech firms have issued profit warnings and cut jobs.

    Tech firms are reversing pandemic-era exuberance, cutting jobs after years of hiring sprees. Google owner Alphabet plans to axe about 12,000 workers; Microsoft, Amazon and Meta are together firing almost 40,000.

    “Despite being a rate sensitive investment, NASDAQ has not responded to the implications of interest rates. If rates continue to rise in 2023, we may see a significant sell-off,” said Bruno Schneller, a managing director at INVICO Asset Management.

    DEFAULT RISKS

    The risk premium on the corporate debt has fallen since the start of the year and signals little risk, but corporate defaults are rising.

    S&P Global said Europe had the second-highest default count last year since 2009.

    It expects U.S. and European default rates to reach 3.75 per cent and 3.25 per cent, respectively, in September 2023 versus 1.6% and 1.4% a year before, with pessimistic forecasts of 6.0 per cent and 5.5 per cent not “out of the question.”

    And with defaults rising, the focus is on the less visible private debt markets, which have ballooned to $1.4 trillion from $250 billion in 2010.

    In a low-rate world, the largely floating-rate nature of the financing appealed to investors, who can reap returns up to the low double digits, but now that means ballooning interest costs as central banks hike rates.

    CRYPTO WINTER

    Bitcoin staged a recovery at the start of the year but was languishing at two-month lows on Friday.

    Caution remains. After all, rising borrowing costs roiled crypto markets in 2022, with Bitcoin prices plunging 64%.

    The collapse of various dominant crypto companies, most notably FTX, left investors shouldering large losses and prompted calls for more regulation.

    Shares of crypto-related companies fell on March 9, after Silvergate Capital Corp, one of the biggest banks in the cryptocurrency industry announced it would wind down operations and sparked a crisis of confidence in the industry.

    FOR SALE

    Real estate markets started cracking last year, and house prices will fall further this year.

    Fund managers surveyed by BofA see China’s troubled real estate sector as the second most likely source of a credit event.

    European real estate reported distress levels not seen since 2012 by November, law firm Weil, Gotshal & Manges found.

    How the sector funds itself is key. Officials warn European banks to risk significant profit hits from sliding house prices, making them less likely to lend to the sector.

    Real estate investment management firm AEW estimates the sector in UK, France and Germany could face a 51 billion euro debt funding gap through 2025.

    Asset managers Brookfield and Blackstone recently defaulted on some debt tied to real estate as interest rate hikes and falling demand for offices in particular hit property values.

    “The reality that some of the values out there aren’t right and perhaps need to be marked down is something that everyone’s focused on,” said Brett Lewthwaite, global head of fixed income at Macquarie Asset Management.

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