Markets on alert after US banks join forces to rescue First Republic – business live

Adam Slater, lead economist at Oxford Economics, has looked at what banking crises mean for economic growth.

The failure of Silicon Valley Bank and other stresses in the global banking system have triggered a sharp repricing in financial markets, with stocks and bond yields sliding. Our baseline assumes a banking crisis will be averted. But some shift in market pricing is not surprising considering that a banking crisis – even if a tail risk – would have very serious consequences for growth.

Historically, banking crises tend to hit output hard. Upfront effects can be substantial and lasting damage is also possible – some estimates of the cut to long-term GDP are in the range 5%-10%. Even crises focused on smaller banks can have a substantial negative impact.

The channels through which banking crises affect economies include: disruption to payments, negative wealth effects, damage to output in the financial sector, and sharply tighter credit conditions for the broader economy – bank share prices are a leading indicator of bank credit standards. Fiscal clean-up costs can also add to the burden via higher long-term interest rates. Our recent modelling captures these kinds of impacts.

A notable risk area is the effect on lending to commercial property. This can be an important channel even when a banking crisis is focused on smaller banks, such as in the US savings and loans crisis and the UK’s secondary banking crisis. CRE [commercial real estate] lending could be a problem area today, too, given the already-weak trends in the sector and its concentration in smaller US banks.

The impact of banking crises can be uneven across economies, depending partly on structural factors such as the prominence of sensitive sectors. But policy matters, too. Ideally, the authorities step in early enough with effective measures to stem contagion to the wider economy. But even if contagion is not avoided, how it is then dealt with matters, as the sharp contrast in the performance of economies like Sweden and Cyprus after their banking crises shows.

Analysts at Allianz Research, led by chief economist Ludovic Subran and head of capital markets research Eric Barthalon, have looked at the US bank failures and what’s next.

The SVB failure was caused by poor risk management choices but also highlights banks’ general macro-financial challenges from restrictive monetary policy, which essentially removes diversification. Negative returns from bonds and equity put pressure on assets while quantitative tightening has led to a contraction of money supply, resulting in greater competition for deposits (as banks lend less).

Essentially, SVB was the epitome of wrong-way risk – it accepted very lumpy deposits from start-ups (which parked their venture capital funding), used related-party equity in these start-ups to collateralise loans and invested excess funds in mostly long-dated mortgage-backed securities at a time when the yield curve was inverting even more, squeezing their net interest margin. As much as central banks’ fast rate hikes to tackle inflation hit the bank’s asset side (resulting in unrealised losses that exceeded their capital base) they also caused an economic pinch for their start-up depositors, who started withdrawing their funds long before the deposit run that brought SVB to its knees.

In the wake of SVB’s failure, banks will become even more conservative in their lending. The planned resolution of the SVB imposes direct cost of other US banks, which will foot the bill for making all depositors whole (though higher FDIC fees) but, more critically; there is also an indirect effect of rising moral hazard in the banking sector as the Federal Reserve seems to be willing to still backstop failing banks. Over the near term, financing conditions are bound to tighten further in the US economy (and other countries) as banks raise lending standards and carefully safeguard their liquidity positions, further retrenching credit.

What to watch 

• Implications for the European banking sector – little spillover risk so far and shock absorbers are in place 

• Monetary policy response – rates close to peak as retrenching credit and slowing growth will do the heavy lifting to bring down inflation 

• Implications for markets – headed for hard landing in the blink of an eye!

Credit Suisse shares fall 4%

BP is the top riser on the FTSE 100, up nearly 4%, as oil prices have strengthened, with Brent crude, the global benchmark, rising to $75 a barrel. Shell is 3.2% ahead while mining companies Glencore and Antofagasta are also among the biggest risers.

Victoria Scholar, head of investment at the trading platform interactive investor said:

European markets have opened higher with oil giants like Shell and BP at the top of the FTSE 100 thanks to strengthening oil prices. Focus turns to the latest euro area inflation data at 10am which is expected to remain at around 8.5%, a day after the ECB raised rates by 50 basis points despite the market turmoil.

Her colleague Richard Hunter, head of markets, said:

Investors regained some poise after the tribulations of recent days, boosted by further actions to stem the potential of bank sector contagion…

The general waves of relief also washed over to UK shores, with the main indices again reflecting a more positive frame of mind for now. Banks recovered some of the losses of the last week, although there remains some way to go before the potential of contagion can be definitively dismissed and those share prices be able to return to their previous levels. Meanwhile, resource stocks also saw from benefit from some renewed strength in the oil price, although that price is still down by 13% this year. Broker upgrades to the likes of the London Stock Exchange and GlaxoSmithKline also underpinned something of a return to a risk-on approach by investors.

The brisk opening returned the FTSE-100 to marginally positive territory for the year, where it has now added 0.5% although remaining some way off its recent record high. The FTSE-250 is not far behind and broadly unchanged in the year to date, with investors generally not ready to commit to a full market recovery until the financial picture becomes clearer.

Here’s our full story on US investors in Credit Suisse launching legal action against the Swiss bank. They claim that it overstated its prospects before this week’s shares crash.

Concerns remain around Credit Suisse, as its credit default swaps remain flat.

The five-year CDS are unchanged from yesterday’s close at 1035 basis points, according to S&P Global Market Intelligence.

Analysts at Deutsche Bank led by Jim Reid said:

Some optimism has returned to markets over the last 24 hours, with bank stocks stabilising on both sides of the Atlantic and two-year yields surging back. Even the European Central Bank’s decision to pursue a 50bp hike went without incident, and investors grew in confidence that the Fed would follow up with their own 25bps hike next week, so we’re starting to see a modest change in the mood music. It’s also telling this morning that in Asia, US yields and equity futures are fairly stable.

The concerns haven’t gone away though, as while Credit Suisse saw its equity price increase, its bonds/CDS were generally flat to weaker…

Their bonds stayed fairly stressed yesterday even with the market bounceback. The five-year credit default swaps stayed around the +1000 level, whilst there were further declines in the value of their debt – notably their ’29 EUR bonds are trading under €70.

That was in spite of the announcement we highlighted yesterday that they’d be using a SNB liquidity facility, which initially saw the share price surge +40% at the open, before paring back around half those gains to “only” close up +19.15%.

Despite the gains in stock markets, investors remain cautious.

Stephen Innes, managing partner at SPI Asset Management, said:

It turned into a relatively normal day here in Asia stocks… The market remains cautious; traders do not want to get overexcited, especially with investors still focusing on what can go wrong instead of what could go right.

Granted, there is still a considerable element of headline risk, especially over the weekend when traders can’t react, which could again upset the proverbial apple cart on Monday morning open. Not to mention, the uncertainty around the Fed policy reaction function is keeping rates volatility elevated.

The UK chancellor Jeremy Hunt, who presented his spring budget on Wednesday, has ditched plans to make sovereign wealth funds (SWFs) pay corporation tax on property and commercial enterprises after cabinet warnings that the move would hit investment and economic growth, the Financial Times has reported.

Kemi Badenoch, business and trade secretary, led pressure on the Treasury to drop the proposals after warnings that SWFs, which include some of the largest global investors, might pull out of UK projects.

The decision to drop the proposals came as a surprise to tax experts. Ahead of the budget, Tim Sarson, UK head of tax policy at KPMG, told the FT he thought it was a “racing certainty” the changes would be made.

European shares open higher, oil prices rise

US investors in Credit Suisse file legal action

Alex Lawson

Here’s a handy explainer for those scratching their heads over what this all means: How to understand Credit Suisse, Silicon Valley Bank and fears of a new crisis. By the Guardian’s banking correspondent, Kalyeena Makortoff, and financial editor, Nils Pratley.

People worry that that this is the start of what some fear could be a global, slow-rolling banking crisis.

First, the collapse of Silicon Valley Bank in the US caused jitters in markets that spread across the world. SVB was supposed to be a regional player whose failure would be unlikely to have profound ramifications – but then a longstanding set of problems at Credit Suisse, a far more consequential institution, turned into an emergency. Its shares dropped 24.5% in a day, and £75bn was wiped off the FTSE 100. Premature though it might have been, people started saying “2008”, which is basically Voldemort for financial markets.

Yesterday, Credit Suisse secured a loan facility with the Swiss Central Bank, intended as a guarantee of its future stability, and the panic somewhat abated – and it’s important to say that we are a long way from a full-blown crisis. But there was more evidence of trouble in the US, where Wall Street giants agreed an unprecedented plan to deposit $30bn to prop up First Republic, another bank on the brink.

Credit Suisse’s problems have not vanished, and suddenly investors are looking hard at whether other European and US institutions might be in the same boat. Impenetrable though much of this is to a layperson, it’s unfortunately not going away.

Facing heat for his investment fund’s role in triggering the run on Silicon Valley Bank last week, billionaire Peter Thiel told the Financial Times that he had $50m of his own money “stuck” in the bank when it collapsed.

Even as Thiel’s Founders Fund was advising companies to move their money from the bank, a decision that has been widely blamed for precipitating its failure, Thiel said that he kept a portion of his own $4bn personal fortune in the bank.

“I had $50m of my own money stuck in SVB,” Thiel told the Financial Times in a story published yesterday, saying that he believed the bank would not fail.

Introduction: Markets on alert after US banks join forces to rescue First Republic