UBS examining takeover of Credit Suisse

UBS AG was examining on Saturday a takeover of embattled lender Credit Suisse that could see the Swiss government offer a guarantee against the risks involved.

The 167-year-old Credit Suisse is the biggest name ensnared in the market turmoil unleashed by the collapse of US lenders Silicon Valley Bank and Signature Bank over the past week, and its slide has fanned fears of broader banking problems.

To get the crisis under control, UBS was coming under pressure from the Swiss authorities to carry out a takeover, Reuters' sources said. Under the plan, Credit Suisse's Swiss business could be spun off, they added.

Credit Suisse Chief Financial Officer Dixit Joshi and his teams were meeting over the weekend to assess their options for the bank, people with knowledge of the matter said.

The bank's share price swung wildly this week, during which it was forced to tap US$54 billion in central bank funding, and Credit Suisse had lost a quarter of its market value by Friday night.

The mood in Switzerland, long considered an icon for banking stability, was pensive as executives wrestled with the future of the country's biggest lenders.

"Banks in permanent stress" read the front page headline of the Neue Zuercher Zeitung newspaper on Saturday morning.

Credit Suisse ranks among the world's largest wealth managers and is considered one of 30 global systemically important banks whose failure would cause ripples throughout the entire financial system.

In a sign of its vulnerability, at least four of Credit Suisse's major rivals, including Societe Generale SA and Deutsche Bank AG, have put restrictions on their trades involving the Swiss bank or its securities.

Goldman Sachs cut its recommendation on exposure to European bank debt, saying a lack of clarity on Credit Suisse's future would put pressure on the broader sector in the region.

Although the banking system was more robust than it was at the time of the financial crisis in 2008, a more forceful policy response is likely needed to bring some stability, Goldman analyst Lotfi Karoui wrote in a note to clients.

Already this week, big US banks provided a US$30 billion lifeline for smaller lender First Republic while US banks altogether have sought a record US$153 billion in emergency liquidity from the Federal Reserve in recent days.

This reflected funding and liquidity strains on banks, driven by weakening depositor confidence, said ratings agency Moody's, which this week downgraded its outlook on the US banking system to negative.

In Washington, focus turned to greater oversight to ensure that banks - and their executives - are held accountable.

US President Joe Biden called on Congress to give regulators greater power over the sector, including imposing higher fines, clawing back funds and barring officials from failed banks.

Some Democratic lawmakers asked regulators and the Justice Department to probe the role of Goldman Sachs in SVB's collapse, said the office of Representative Adam Schiff.

Banking stocks globally have been battered since Silicon Valley Bank collapsed, raising questions about other weaknesses in the financial system.

US regional bank shares fell sharply on Friday and the S&P Banks index posted its worst two-week calendar loss since the pandemic shook markets in March 2020, slumping 21.5%.

First Republic Bank ended Friday down 32.8%, bringing its loss over the last 10 sessions to more than 80%.

While support from some of the biggest names in US banking prevented First Republic's collapse this week, investors were startled by disclosures on its cash position and how much emergency liquidity it needed.

The failure of SVB, meanwhile, brought into focus how a relentless campaign of interest rate hikes by the US Federal Reserve and other central banks, including the European Central Bank this week, was putting pressure on the banking sector.

Many analysts and regulators have said SVB's downfall was due to its specialized, tech-focused business model, while the wider banking system was much more robust thanks to reforms adopted in the years after the global financial crisis.

But a senior official at China's central bank said on Saturday that high interest rates in the major developed economies could continue to cause problems for the financial system.

 

OPEC+ terms oil price drop financially driven

OPEC Plus attributes this week's slide in oil prices to a more than one-year low to be driven by financial fears, not any imbalance between demand and supply, and expects the market to stabilize, four delegates from the oil producer group told Reuters.

Oil sank to a 15-month low on Wednesday, with Brent crude below US$72 a barrel, on concerns about contagion from a banking crisis. Crude stabilized on Thursday after Credit Suisse was thrown a financial lifeline by Swiss regulators.

"It's purely financially driven and has nothing to with the demand and supply of oil," one of the delegates said, asking not to be named. OPEC Plus is most likely ‘wait and see’ in expectation that the situation will normalize soon.

Three other delegates from the OPEC+ Plus producer group comprising the Organization of the Petroleum Exporting Countries (OPEC), Russia and other allies, made similar remarks.

The comments will dampen any speculation that OPEC Plus is concerned about weakening prices and might consider further steps to support the market. The group's next policy meeting is not until June, though an advisory panel of key ministers meets on April 03.

One of the delegates said OPEC's latest monthly oil market report, released on Tuesday with an upgraded demand forecast for China, pointed to a sound balance between supply and demand.

"We are focusing on market fundamentals," another of the sources said.

Last November, with prices weakening, OPEC Plus reduced its output target by 2 million bpd - the largest cut since the early days of the COVID-19 pandemic in 2020. The same reduction applies for the whole of 2023.

Ministers from Algeria and Kuwait this week praised the decision and Saudi Arabia's energy minister told Energy Intelligence that OPEC Plus will stick to the reduced target until the end of the year.

Credit Suisse secures US$54 billion to prevent global bank crisis

Credit Suisse on Thursday said it would borrow up to US$54 billion from the Swiss central bank to shore up its liquidity and investor confidence after a slump in its shares intensified fears about a global financial crisis.

The Swiss bank's announcement helped stem heavy selling in financial markets in Asian morning trade on Thursday, following torrid sessions in Europe and the United States overnight as investors fretted about a run on global bank deposits.

In its statement early Thursday, Credit Suisse said it would exercise its option to borrow from the Swiss National Bank up to 50 billion Swiss francs (US$54 billion). That followed assurances from authorities in the private banking hub on Wednesday that Credit Suisse met the capital and liquidity requirements imposed on systemically important banks and that it could access central bank liquidity if needed.

Credit Suisse is the first major global bank to be given such a lifeline since the 2008 financial crisis - though central banks have extended liquidity more generally to banks during times of market stress including the coronavirus pandemic.

Asian stocks were hit by Wall Street's tumble on Thursday and investors bought gold, bonds and the dollar. While the bank's announcement helped trim some of those losses, trade was volatile and sentiment fragile.

"It does help. It removes an immediate risk. But it confronts us with another choice. The more we do this, the more we blunt monetary policy, the more we have to live with higher inflation -- and what is it going to be?" said Damien Boey, Chief Equity Strategist at Barrenjoey in Sydney.

"Do bailouts make things better? On the one hand, you are removing a source of risk to the markets which is a clear and present danger. On the other hand we are feeding into this paradigm of monetary policy bucking within itself."

The Swiss bank's problems have shifted the focus for investors and regulators from the United States to Europe, where Credit Suisse led a selloff in bank shares after its largest investor said it could not provide more financial assistance because of regulatory constraints.

The concerns about Credit Suisse added to broader banking sector fears sparked by last week's collapse of Silicon Valley Bank and Signature Bank, two US mid-size firms.

Credit Suisse's borrowing will be made under the covered loan facility and a short-term liquidity facility, fully collateralized by high quality assets. It also announced offers for senior debt securities for cash of up to 3 billion francs.

"This additional liquidity would support Credit Suisse’s core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs," the bank said.

Investor focus is also on any action by central banks and other regulators elsewhere to restore confidence in the banking system as well as any exposure businesses may have to Credit Suisse.

SVB's demise last week, followed by that of Signature Bank two days later, sent global bank stocks on a roller-coaster ride this week, with investors discounting  assurances from US President Joe Biden and emergency steps giving banks access to more funding.

FINMA and the Swiss central bank said there were no indications of a direct risk of contagion for Swiss institutions from US banking market turmoil.

On Wednesday, Credit Suisse shares led a 7% fall in the European banking index, while five-year credit default swaps (CADS) for the flagship Swiss bank hit a new record high.

The investor exit for the doors prompted fears of a broader threat to the financial system, and two supervisory sources told Reuters that the European Central Bank had contacted banks on its watch to quiz them about their exposures to Credit Suisse.

The US Treasury also said it is monitoring the situation around Credit Suisse and is in touch with global counterparts, a Treasury spokesperson said.

Rapid rises in interest rates have made it harder for some businesses to pay back or service loans, increasing the chances of losses for lenders who are also worried about a recession.

Traders are now betting that the Federal Reserve, which just last week was expected to accelerate its interest-rate-hike campaign in the face of persistent inflation, may be forced to hit pause and even reverse course.

Bets on a large European Central Bank interest-rate hike at Thursday's meeting also evaporated quickly as the Credit Suisse rout fanned fears about the health of Europe's banking sector. Money market pricing suggested traders now saw less than a 20% chance of a 50 basis point rate hike at the ECB meeting.

Unease sparked by SVP's demise has also prompted depositors to seek out new homes for their cash.

Ralph Hammers, CEO of Credit Suisse rival UBS said market turmoil has steered more money its way and Deutsche Bank CEO Christian Sewing said that the German lender has also seen incoming deposits.

 

 

 

Silicon Valley Bank collapse stirs up fears

The collapse of Silicon Valley Bank brings back memories on Capitol Hill of rescuing the financial markets during the 2008 collapse, raising concerns among lawmakers that taxpayers may have to pay to bail out risky financial bets. 

President Joe Biden assured the nation that no taxpayer money will be used after lawmakers warned over the weekend they will not support bailouts, which are unpopular with voters.  

The president said the money to cover depositors would come from the fees banks pay into the Federal Deposit Insurance Corporation (FDIC) and promised that managers at failed banks would be fired and stock-holding investors would not be protected — sidestepping a fight with Congress.  

Still, there is already disagreement over what constitutes a bailout and the fund being used to pay depositors — including over the US$250,000 for standard insurance from the FDIC — is backed by the full faith and credit of the United States government.

Some conservative Republicans are already making the argument that covering depositors above the FDIC’s regular US$250,000 deposit insurance limit is creating a future moral hazard and could embolden risky behavior heading forward.  

A GOP aide predicted that more conservatives would push that argument once they return to Washington and have more time to examine the details of Biden’s intervention.  

“I’m sure there will be people who take the view that there shouldn’t be government intervention on any of this,” the aide said.  

Lawmakers on both sides of the aisle spent Sunday assuring voters they were against a bailout.

Sen. Bob Menendez said, he was not ready to offer them a bailout by any stretch of the imagination, while Rep. Nancy Mace said, “It’s still very early. I don’t even think it’s been 48 hours. But at this time, I would not support a bailout.”

Biden’s decision to intervene and pledge on Monday that no depositors will lose their money was viewed as an effort to avoid repeat of the panic that gripped the financial markets in 2008 after the Bush administration decided not to rescue Lehman Brothers Inc., a major investment bank.  

Former Sen. Ben Nelson, who was in the Senate when Lehman Brothers collapsed, said then-Treasury Secretary Hank Paulson and other senior administration officials were uncertain at first about how to respond to the crisis. 

“It isn’t quite déjà vu because it’s different. First of all, Biden stepped forward and said this is what it’s going to be. It isn’t a bailout, it’s going to be making sure depositors are covered,” Nelson said.  

Nelson said Biden appears to have learned a key lesson from the fall of 2008, the federal government must act quickly and decisively to prevent fear from quickly spreading through the financial markets.  

“I don’t know how many days it was, the secretary of the Treasury was getting together with us trying what to do. There wasn’t any plan that I can recall that came together right away as quickly as this did,” he said, comparing the federal response in 2008 to today.  

Liberals, meanwhile, are going on offense by blaming Silicon Valley Bank’s collapse on a banking deregulation bill signed in 2018 under President Trump.  

“In 2018, Donald Trump signed a law to deregulate large banks like SVB and Signature Bank. In opposing Trump’s decision to roll back the toughest regulatory requirements in Dodd-Frank, I warned at the time that this could create serious vulnerabilities and may make it more difficult for regulators to spot a threat to financial stability from a larger bank while increasing competitive pressures on community banks and credit unions, Sen. Jack Reed, a senior member of the Senate Banking Committee, said in a statement Monday afternoon.  

The Economic Growth, Regulatory Relief, and Consumer Protection Act, which passed the Senate with bipartisan support in 2018, scaled back some requirements of the 2010 Dodd-Frank Act, which Congress passed after the 2008 financial collapse.  

Critics say it contributed to the downfall of Signature Bank, which the FDIC took control of Sunday.  

Together they mark the second- and third-biggest bank collapses, respectively, in US history and kindled fears of runs on regional banks across the country. 

Shares of San Francisco-based First Republic bank fell 62% on Monday while Western Alliance Bancorp shares fell 47% and PacWest Bancorp shares dropped 21%. 

“Let’s be clear. The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that I strongly opposed,” Sen. Bernie Sanders said.   

“Five years ago, the Republican Director of the Congressional Budget Office released a report finding that this legislation would ‘increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail,” he said.  

Sen. Elizabeth Warren wrote in a New York Times op-ed Monday, “Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks.” 

Some Republicans, on the other hand, blamed Silicon Valley Bank’s downfall on a lack of proper oversight from the Federal Reserve Bank of San Francisco. They argue that federal regulators have become too preoccupied with climate and other woke issues to watch out for fundamental problems.  

“There’s no mystery what transpired. They had 10% insured deposits; they had massive unrealized losses because their portfolio was weighted in long-duration debt so they had a liquidity mismatch. It didn’t matter what artificial regulatory you put into place, you could not overcome the underlying fundamentals of the mismatch and the high rate of uninsured deposits,” said a second GOP aide.  

“How the hell did the regulator miss this? That’s the whole point of supervisory examination, to spot this type of thing,” the aide added.  

The Republican aide argued that Silicon Valley Bank’s collapse doesn’t call for a new wave of regulation because its circumstances of its liquidity shortfall don’t affect the vast majority of other banks.  

“There was no bank in the country with a larger liquidity mismatch than SVB. Nobody else even comes close to the problem that this bank had. That’s what makes it so astonishing that the regulators missed it,” the GOP aide added.  

Silicon Valley Bank reported in a December regulatory filing that 95 percent of its bank deposits were uninsured.  

Biden administration officials hastily convened a call with Republicans and Democrats in the House and Senate Sunday evening to brief them on the plans to insure the deposits at Silicon Valley Bank and Signature Bank.  

The briefing was convened so quickly that only a few Senate Republicans participated, including Sen. Mitt Romney (Utah) and Senate Republican Whip John Thune’s staff.  

The administration held a second briefing midday Monday to bring Republican senators who missed the Sunday call up to speed.  

The quick outreach appeared to pay off when Romney voiced support for the administration’s actions during the Sunday call and then tweeted his support.  

Romney retweeted a statement from the Federal Reserve announcing the plan to ensure depositors’ savings and praised it as the right decision.  

Democratic leaders on Monday applauded the Biden administration for taking quick action and urged colleagues to look closely at the failure of Silicon Valley Bank to weigh whether more regulation is needed.  

“We are grateful that the Biden administration, Federal Reserve and FDIC took swift action to safeguard depositors and maintain confidence in the banking system,” Senate Majority Leader Charles Schumer and House Democratic Leader Hakeem Jeffries said in a joint statement.  

“Americans should have faith that bank regulators are doing everything they can to protect consumers. In the coming days and weeks, Congress will be looking closely at the causes behind the run on Silicon Valley Bank and other banks and how we can prevent a similar crisis in the future,” they said.  

The vast majority of congressional Republicans stayed quiet on Monday, with neither Speaker Kevin McCarthy nor Senate Republican Leader Mitch McConnell commenting on the decision to cover the potential losses of bank depositors.  

McCarthy told Fox News Sunday that the administration had the tools to handle the current situation but voiced hope that regulators would find a larger bank to buy Silicon Valley Bank to cover the depositors.  

“This bank is a unique bank, where they do have assets, they have an amazing clientele, it’s something that could be very possible [for] someone to purchase this bank,” he said, describing that as “the best outcome.”