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Good morning SMLers
The crazy week continues

Morning all

My morning has been a metaphor of the world economy
or as Sonja Laud, chief investment officer at Legal & General, told BBC Radio 4’s Today programme
“If you slam on the brakes, the chances are something will break and it is always the weakest links that are flushed to the surface first.
SO, is it the central banks Frances that are causing these pile ups ?

Lots of people are saying it’s all the Fed’s fault
Hiked interest rates too much and too quickly, banks weren’t prepared,

To recap this week: Fed raised 25 bps but said it was near end of hike cycle
Brazil held rates steady
Switzerland and Norway today raised rates
ECB raised last week
BoE expected to raise 25bps today at noon

Fed signalled there might be more rate rises to come, but with the caveat that credit tightening by banks might make this unnecessary

Norway’s central bank, the first major western to start raising interest rates after the Covid-19 pandemic, continued with its hikes and warned more was to come despite recent financial turmoil.
Norges Bank on Thursday increased rates by 0.25 percentage points to 3 per cent, and suggested they would go higher at its next meeting in May as it tries to bring inflation under control.
“There is considerable uncertainty about future economic developments, but if developments turn out as we now expect, the policy rate will be raised further in May,” said governor Ida Wolden Bache.
I went for dinner last night and a pasta “primi” was £49

wow

SNB increased its policy rate by 50 basis points to 1.5 per cent on Thursday, citing a “renewed increase in inflationary pressure”.

Central banks seem determined not to be blown off the monetary tightening course by wobbly banks

Brazil’s central bank cited rising inflation expectations as it kept interest rates unchanged for the fifth consecutive policy meeting on Wednesday, drawing concern from the government and weakening bets of imminent monetary easing.
The bank’s rate-setting committee, known as Copom, maintained its Selic benchmark interest rate at 13.75%.
The decision, which defied intense pressure from the new government of President Luiz Inacio Lula da Silva to reduce borrowing costs, matched the expectations of all 30 respondents in a Reuters poll.
What’s causing the wobble in markets then Frances? Could it be this ,,,
Fed Chair Powell: “All depositors’ savings in the banking system are safe.” Treasury Secretary Yellen: the government “is not considering insuring all uninsured bank deposits.”

Yeah, mixed messages are always a bad idea!
that was a car crash of a presser frankly
Powell is presumably trying to do a “whatever it takes”, in the sense that the Fed will do whatever is necessary to maintain liquidity in the banking system and ensure banks have sufficient capital to absorb losses
Though it hasn’t exactly been doing that properly for the mid-size banks
Meanwhile, Yellen was under pressure to lift the FDIC limit to stem deposit flight from mid-size banks to big banks
But she’s decided not to do that, so presumably uninsured depositors now have carte blanche to move their deposits to TBTF banks.


I think we are going to see a significant shakeout among the US’s equivalent of the Landesbanks.

Is that necessarily a bad thing? People like to cite Canada as some great banking paradise

Lots of people trying to compare this to 2008 but the vibe is more Savings & Loans. Smaller banks with unhedged interest rate risk caught out by rate hikes.
I think the US system might well be more resilient if it had fewer, larger and better regulated banks – a la Canada
So for me, bring on the consolidation of mid-size banks.

There does seem to be a disregard for moral hazard

But this has created some consternation, not only because of the mixed message, but also because SVB and SBNY depositors have been fully protected, whereas depositors at other mid-size banks now won’t be.

And, the repercussions those seemingly disconnected failures have had in Europe

European regulators were not happy with the US apparently abandoning the bank resolution regime
So normal service has now been restored.

Izzy wanted us to inform you that she is hosting this summit today in Paris: https://www.politico.eu/financesummit/
Good timing for such high level guests

I think banks that carry unhedged interest rate risk and actively game accounting standards to enable them to do so deserve to fail.


I noticed that the Greek central bank was very quick to reassure markets that Greek banks were fine. Are they well enough capitalised to withstand a run?
And there hasn’t been a peep out of Cyprus.

Will we starts seeing a balkanisation of banking?
It seems the regulators are not all seeing eye to eye

Swiss bank AT1s are going to trade at a discount to other European bank AT1s now

Yes, i remember after the last crisis there was lots of fantasy M&A chat about which banks would merge which never materialised due to competition and nationalistic concerns , that seems to be out the window here

Speaking of massive banks, it appears that the deal under which HSBC took over SVB UK involved relaxing the ring fencing rules so that SVB UK could sit within the ring fence.
We should see this in the context of the Edinburgh reforms, which propose some relaxation of ring fencing rules to accommodate international and riskier SMEs. But at the moment, HSBC seems to have an advantage over other banks.

Is there a risk that they have also bought a bunch of very bad loans?

The loans were a relatively small proportion of the assets. And SME loans are often high risk. The question for me is – should tech startups with VC funding be seen as SMEs and therefore sit within the ring fence? Or is this risky investment banking crossing the boundary?

And who can answer that question?

There’s a paper by Bob Lyddon which is very negative about this – let me find it

Gold has climbed over 7% so far this month, closing in on record highs above $2,000 hit in March 2020, on concerns surrounding the banking and financial industry, mainly triggered by higher rates.

Markets seem to think central banks are not taking seriously enough the risks to the financial sector from rate rises. They have a point imho – Fed rate rises historically have always triggered bank failures and often financial crises.

Yes, going back to what Sonja Laud said: “Over 70 years and every hiking cycle we have seen in that period, we have never seen a hiking cycle that has not led either to a recession – which is 80pc of the cases – or a financial crisis, or both.
“The question always has been why should this time be different?

15 years of low interest rates lulled people into a false sense of security.

And lulled them into all sorts of other investments

Hedge Fund Manager Odey Bets on UBS Following Credit Suisse Deal
- Crispin Odey says he’s invested 2% of his funds in lender
- Investors are racing to break down deal’s implications for UBS
And Boaz Weinstein who I mentioned on Monday, is apparently in the money https://www.reuters.com/business/finance/boaz-weinsteins-trade-looks-set-flourish-credit-suisse-demise-2023-03-20/
Hedge fund manager Boaz Weinstein pinned hopes on Credit Suisse’s survival, but also money on its demise. His derivatives trade which bet both on the success and failure of the bank now looks set to pay off, according to data from IHS Markit.
That’s interesting @Darren

lol, an each-way bet… he can’t lose

I really am interested to see which way UBS goes now

There’s clearly a risk that UBS will find some seriously bad assets on CS’s balance sheet, as Lloyds did with HBOS, but the Swiss government has a lot riding on this deal. UBS has been bailed out before and no doubt would be again.
and the UBS/CS deal holds out hope for shareholders (though not AT1 holders) in the event of a bailout.
I can’t see UBS hanging on to CS’s Swiss bank for long. Not enough competition in the Swiss marketplace.

Colm Kelleher is Ex-MS and Ralph Hamers ex-ING – both came through the crisis stronger, they could pull it off

yeah they’re a good team

I have actually met both of them in my past journalistic life
The problem is that there was clearly a problem with CS, that couldn’t be stemmed

Too many dodgy deals, too little competence

@MissMarketslive i think you have a point, It does come across as sheer stupidity and like you said, failing to prepare which is their job

@Darren yes the acquisition of HBOS brought down Lloyds
If I may divert attention back across the Pond….
SVB’s failure caught all the headlines, but two other banks also failed at the same time – Silverlake and Signature Bank NY. Both were crypto-related.

For context, on historic bank failures

The SEC is now clamping down hard on crypto. Coinbase was issued with a Wells notice yesterday, and Justin Sun (of BitTorrent and Tron) is being sued for market manipulation and fraud, along with eight celebrities who touted his tokens.

I’m not a crypto expert but I do keep telling Izzy we need to do a special crypto SML

There was some market chatter that Bitcoin was being seen as a safe haven akin to gold, but it sank on Fed news yesterday. And if the SEC is hell-bent on stopping anyone in the US trading crypto, it’s hard to see that it will be much of a safe haven, at least in the US.

Gary Gensler is trying his hardest

Fed/FDIC/OCC have been saying since January that crypto-related activities are not consistent with safe and sound banking practices
The Fed refused Kraken and Custodia master accounts because of their crypto focus
And there’s lots of talk in crypto circles that SBNY was closed down because of its crypto focus.
NY Community Bank has bought much of SBNY – but not the crypto-related bits.

Small story just hit the wire https://news.sky.com/story/crypto-firm-ziglu-plots-sale-after-collapse-of-robinhood-deal-12840764
Ziglu, a British cryptocurrency business, is exploring a cut-price sale nearly a year after agreeing an ultimately aborted takeover by Robinhood, the American fintech giant.
One insider said Ziglu was seeking £2m at a valuation of roughly £10m, underlining the tough trading environment in which the company now operates
Last year, Ziglu was on the brink of a $170m takeover by Robinhood, the US-based share trading platform.

Are we seeing the bursting of a tech bubble?

From $170m to $10 m in a year…

that’s a huge fall, and not really crypto-related. Value destruction in the wider fintech industry

I do think you’re onto something Frances. There is definite a crypto backstory that has not been explored enough yet

Those who have invested in tech will call it value destruction, those who have been laughing on the sidelines will call it sensible valuation.
Buckle up, everyone….BoE hard landing coming…
I might pick up the crypto backstory with Izzy tomorrow.

On that note… shall we wait for the announcement before we sign off?

Happy to do so

25bps rise exactly as expected. Will pass without a ripple.

ooh split vote, wonder who the dissenters are?

Thanks everyone for joining us today !
Looks like you’re in for a crypto treat tomorrow

Thanks everyone. Great comments as always. See you tomorrow at 11 am, when I’ll be joined by Izzy. .