Introduction: Credit Suisse turns to Swiss National Bank; ECB rate decision ahead
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
With a crisis raging, Credit Suisse has turned to its central bank for support in an attempt to calm fears over its finances.
In a statement overnight, Credit Suisse announced that it would take up to 50bn Swiss francs (£44bn) from the Swiss National Bank in what it called “decisive action” to strengthen its liquidity.
Credit Suisse found itself at the eye of the storm in the banking sector yesterday – shares tumbled 30% at one point – after its largest shareholder said it could not add to its stake in the bank.
That prompted talk with the Swiss National Bank and financial regulator FINMA, who declared last night that the SNB would provide liquidity “if necessary.”
Credit Suisse’s CEO, Ulrich Koerner, said the additional liquidity would support Credit Suisse’s core businesses and clients, saying:
These measures demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders.
We thank the SNB and FINMA as we execute our strategic transformation. My team and I are resolved to move forward rapidly to deliver a simpler and more focused bank built around client needs.
Credit Suisse also announced overnight that it will buy back 3bn Swiss francs worth of its debt, as part of its move to calm investors’ nerves.
Other central banks are also watching the situation. The Guardian understands that staff at the Bank of England are continuing to monitor developments in the financial sector closely.
Yesterday, the head of asset manager BlackRock warned that the collapse of Silicon Valley Bank last weel could just be the start of “a “slow-rolling crisis” in the US financial system with “more seizures and shutdowns coming”.
Fears over the banking sector roiled markets yesterday. Around £75bn was wiped off the UK’s FTSE 100 index, as the blue-chip index slumped by 3.8% – its biggest percentage fall since the first day of the Ukraine war.
Stocks are expected to open higher today, clawing back some of Wednesday’s losses.
Also coming up today
The Credit Suisse crisis looms over the European Central Bank, as it meets to set eurozone interest rates today.
Back in February the ECB pre-committed to a large increase in borrowing costs today, of half a percent (50 basis points) – but that may be less palatable given the turmoil in the markets.
Previous rises in central bank interest rates, and the impact on bond prices, is clearly already causing serious ructions in the banking sector, with three US banks having failed in the last week. So with the markets in such turmoil, the ECB’s governing council may be tempted to hold off on a rate increase, or plump for a smaller quarter-point rise.
After all, the woes of the global banking sector mean that inflation is yesterday’s problem, says IG analyst Tony Sycamore.
Sycamore adds:
And to a certain extent, the past week’s events have done the dirty work of central banks and will dampen inflation. Higher funding costs, tougher regulation, lower margins, and capital raises will restrict the flow of credit to the economy, and both growth and inflation will slow.
The agenda
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12.30am GMT: US weekly jobless claims
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1.15pm GMT: European Central Bank interest rate decision
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1.45pm GMT: European Central Bank press conference
Key events
Richard Partington
The European Central Bank is facing a dilemma over whether to push ahead with its plans for a large interest rise today amid fears over the strength of the banking system after Wednesday’s heavy sell-off of the Swiss banking firm Credit Suisse, my colleague Richard Partington writes.
After raising interest rates since last summer at a record pace to tackle high inflation across the eurozone, the ECB had in effect committed to another 0.5 percentage point increase in borrowing costs this week.
However, financial markets have drastically cut back expectations for the central bank to push ahead with the plan. Before the rate decision on Thursday afternoon, trading in markets reflected an almost 50-50 chance that the ECB would go ahead with a 0.5 percentage point rise. Previously it was considered a certainty.
Analysts said the central bank could opt for a smaller 0.25 percentage point rise as concerns over the health of the banking system rippled through markets. It comes after the collapse of Silicon Valley Bank in the US rattled global banking shares earlier this week, stoking fears of a rerun of the 2008 financial crisis, and leading global investors to tear up their expectations for central bank rate increases.
Victoria Scholar, the head of investment at Interactive Investor, said:
“Last week, a 50-basis point hike was almost an inevitability. However, the collapse of SVB and Credit Suisse’s turmoil have seen markets wind back their ECB expectations.
“Financial markets are now pricing in an increased chance of a 25-basis point hike, but whether the SNB’s support for Credit Suisse could embolden the ECB to continue with its hawkish path is yet to be seen.”
Here’s the full story:
We’ll find out in just over an hour which way the ECB has decided to move….
There are still jitters in America’s banking system, following the collapse of three banks in the last week.
Shares in First Republic, the San Francisco-based regional bank, are down around 20% in pre-market trading:
First Republic’s shares have lost almost three quarters of their value in the last week, as the sector was rocked by the collapse of Silicon Valley Bank.
Rob Burgeman, senior investment manager at wealth manager RBC Brewin Dolphin, explains:
“On the face of it, the bailout for Silicon Valley Bank (SVB) essentially being restricted to depositors – with equity and bond holders essentially being thrown to the wolves – does remind people that investing into the banking sector a riskier proposal than it seemed just a few days ago.
“The problems that SVB had were through investing into long-dated securities – very high quality, asset-backed bonds – but not reflecting their correct values, as the bank intended to hold them to redemption. In the rising interest rate environment that we have seen over the last year, some of these bonds were trading substantially below their redemption value.
“The bonds trading below their redemption value was fine, in principle, until a number of deposit withdrawals meant that they had to sell some of these below their book values. This, in turn, created a shortfall on SVB’s regulatory capital requirements, which it then had to try and fill through raising equity or bonds. When this proved impossible, it was game over.
“The US and UK governments have shown themselves willing to take quick and decisive action to prevent contagion. This is great for depositors, but still leaves shareholders in a more exposed position.
Meanwhile in the UK, we remains on track for a “disastrous decade” of stagnant incomes and high taxes, despite cuts to public services.
That’s the Resolution Foundation’s verdict, after analysing yesterday’s budget.
The thinktank, whose stated aim is to improve the standard of living for low- and middle-income families, said typical household disposable incomes were on track to be lower by the end of the forecast in 2027-28 than they were before the pandemic, when inflation is taken into account.
While the chancellor had announced an “impressively broad suite of policies” to encourage more people into work, he was unable to change the course of declining living standards, the Resolution Foundation said.
Jeremy Hunt’s first Budget was a much bigger affair than many expected, containing a significant policy package aimed at boosting longer-term growth, and the size of the workforce. But the UK’s underlying challenges remain largely unchanged, says @TorstenBell pic.twitter.com/5PSNrQIQxw
— Resolution Foundation (@resfoundation) March 16, 2023
Income tax changes are still the biggest policy this parliament. Permanent changes to personal tax & benefits will increase average incomes for the poorest fifth of households by £417, reduce incomes by £738 for the middle fifth, and reduce incomes by £2,059 for the richest fifth pic.twitter.com/yl6fUBMQZo
— Resolution Foundation (@resfoundation) March 16, 2023
Here’s the full story:
Chris Whittall, associate editor at IFR, has dug into the pricing of the insurance on Credit Suisse’s bonds (credit default swaps), to show how price have hit record levels this week:
Checking on Credit Suisse’s one-year CDS this morning and… oh dear me
Big caveat here is it’s not clear how much (if anything) is actually trading at these levels
But gives you an indication of sentiment in near-term default markets pic.twitter.com/cX0vz1I03P
— Chris Whittall (@Chris_Whittall) March 16, 2023
To some sense of scale here, it’s perhaps useful to zoom out a bit on Credit Suisse’s 1yr CDS
The red circles are (from left to right) the 2008 financial crisis, the eurozone sovereign debt crisis and the start of the pandemic pic.twitter.com/5CmRboe19W
— Chris Whittall (@Chris_Whittall) March 16, 2023
Still no sign whatsoever of contagion to other major investment banks
Here’s the basis point change this month in various 5-year CDS
European bank CDS (Barclays, DB, SG, BNPP, UBS) are all trading tighter so far this morning pic.twitter.com/xqdYyycpeP
— Chris Whittall (@Chris_Whittall) March 16, 2023
More reassuring words from chancellor Jeremy Hunt:
“I do welcome the decision by the Swiss authorities overnight” –
Chancellor says it was right for the Swiss central bank to lend £45 bn to Credit Suisse after its shareprice slumped.
Is Jeremy Hunt worried about the strength and resilience of the banking system?
“The …
— Joel Hills (@ITVJoel) March 16, 2023
…Governor of the Bank of England says he is confident in the resilence of the banking system and I will always listen to him.”
— Joel Hills (@ITVJoel) March 16, 2023
After two hours trading, Credit Suisse shares are holding most of their early gains – up 23% at just over 2 Swiss francs.
We could be in for another nervous trading session today with high volatility and focus on banks, says Peter Garnry, head of equitystrategy at Saxo.
Saxo say:
Troubled Swiss lender Credit Suisse has been extended a lifeline by the Swiss National Government this morning, but will that move sufficiently calm the banking sector and global markets after the collapse of the US’ SVB touched off a firestorm of negative focus on banks?
Elsewhere, the ECB faces a tough task today after pre-committing to a 50 basis point hike, with the market doubting they will deliver and forward expectations marked lower.
ABN Amro: Very early signs are that authorities have turned the tide
There are “very early signs” that the measues taken by Swiss authorities to stabililise Credit Suisse are turning the tide, says ABN Amro’s head of bank research, Joost Beaumont.
Beaumont told clients this morning that the banking sector has been in the spotlight again in financial markets, following the failure of two US banks as well as concerns regarding Credit Suisse.
He adds:
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Credit Suisse issues are mainly related to credibility, as the bank looks solid from a fundamental point of view
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Very early signs are that the steps taken by Swiss authorities and this morning’s capital injection seem to have turned the tide
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We see Credit Suisse as a special case, which was also reflected by the fact that spreads of other banks’ bonds widened by less than Credit Suisse
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We also assess the extent to which European bank are exposed to the risks seen in the US
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We find that a relatively large part of deposits in Europe are covered by the Deposit Guarantee Scheme
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European banks also have lower investments as share of total assets, reducing
risks of changes to asset valuations -
Overall, recent developments can be seen as a wake-up call for the sector, as it will not be immune for the sharp rise in policy rates
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We expect pressure on funding costs and larger differentiation between larger and smaller banks
Analysts at Royal Bank of Canada say the Swiss National Bank has “thrown its arms around Credit Suisse”, with the CHf50bn liquidity lifeline.
They told clients this morning:
Markets were relatively stable in the overnight session on CS’ statement that it is to borrow up to CHF50bn from the SNB, along with reassuring words from major shareholder Saudi National Bank, walking back from yesterday’s damaging comments.
The SNB and FINMA issued a joint statement [yesterday] confirming CS’s capital adequacy and liquidity, albeit later than CS would have liked.
That relatively stability followed some remarkably volatile sessions this week. The yield (or interest rate) on US two-year government bonds fell dramatically, as investors slashed their expectations for interest rate increases.
Despite this morning’s rally, Credit Suisse’s shares are still down almost a quarter so far this year.
They have risen back over 2 Swiss francs this morning, having hit a record lows of CHf1.55 yesterday.
Back in 2007, before the credit crunch, they were worth Chf80.
The problems at Credit Suisse are very different from those that brought down Silicon Valley Bank a few days ago, points out Neil Shearing, group chief economist at Capital Economics.
Shearing adds:
But they serve as a reminder that as interest rates rise, vulnerabilities are lurking in the financial system.
Key areas to monitor are smaller European banks and shadow banks, particularly open-ended funds that might suffer from maturity mismatches.
