UBS takes the Credit (Suisse): What does it mean for the future of banks?
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Hi investors,
It all kicked off at the end of last week when, seemingly out of nowhere, three West Coast banks went belly-up. US authorities stepped in to guarantee Silicon Valley Bank’s customer deposits and provide liquidity to all, calming things down. As things settled in the US, all eyes switched across the pond to Europe’s banking sector and one particularly troubled Swiss giant.
Let’s dive, shall we?
Weekly Round-up
?? Connecting The Dots
It seems like everyone this past week became a bank analyst, well-versed in fancy terms like available-for-sale or held-to-maturity assets. It’s no laughing matter, of course, but you might crack a wry smile at this newfound expertise, considering no one had even heard of Silicon Valley Bank (SVB) just a few days before. But that tends to be the nature of crises or mini-crises. They cause panic precisely because people don’t see them coming, leaving everyone scrambling to understand what just happened. But there’s a comforting factor hidden in this too. SVB’s issues at least seem straightforward (poor risk management and a run on deposits).
The global financial crisis of 2008-09 was a complete mess by comparison: to fully wrap your arms around it, you needed to get up to speed on highly complex things like collateralised debt obligations. And that took a long time. It’s part of the reason why it took the Federal Reserve (the Fed) and its sister authorities months to come up with a solution – the troubled asset relief program (TARP).
So the fact that US authorities put together a rescue package for SVB’s depositors and offered support for the entire banking system in a matter of hours could be taken as a sign that the core issues here aren’t that complicated, and by extension should (hopefully) be easily resolved.
?? Takeaways
1. Smoke signals.
Mind you, smoke’s still billowing out of the European banking sector, leaving investors wondering whether there might be a raging inferno inside. At the centre is the long-troubled lending giant Credit Suisse (now bought out by UBS for over $3B). Now, the bank had issues long before SVB collapsed and filed for Chapter 11 bankruptcy protection, but somehow the West Coast bank’s dramatic failure has people biting their nails about the entire European banking sector, fearful of ripple effects. So, it looks like this is an old-fashioned confidence crisis.
2. Brave face.
The timing is potent for the Fed and the European Central Bank (ECB), both having their latest interest rate decisions to contend with. On Thursday, the ECB stuck to what was believed to be the plan, hiking rates by half a percentage point, exuding an air of calm. See, not raising rates in the midst of an inflation storm would’ve meant it’s more worried about the banking sector than it is about price rises - which evidently, it’s not. Let’s see if the Fed does the same when it meets this week.
?? Also On Our Radar
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Microsoft’s been, ahem, chatting up investors again as it showcased some of ChatGPT’s latest tricks. It’s recently embedded the chatbot into Microsoft’s core Office products, like Excel and PowerPoint. It’s clear that the Seattle software giant is in a hurry to get artificial intelligence (AI) into everyone’s lives before anyone else can. And it’s doing its share price no harm in the process.
?? Light & spicy
Earnings reports this week
Monday: Earnings expected from Pinduoduo and Foot Locker
Tuesday: Fed meeting begins. Earnings expected from Nike, Tencent Music, and GameStop
Wednesday: Earnings expected from Chewy and Petco
Thursday: Earnings expected from Accenture and General Mills