UBS Agrees to Buy Credit Suisse for More Than $3 Billion Deal is part of effort to prevent further erosion of confidence in banking system
(…) pushed into the biggest banking deal in years by regulators eager to halt a dangerous decline in confidence in the global banking system.
The deal between the twin pillars of Swiss finance is the first megamerger of systemically important global banks since the 2008 financial crisis when institutions across the banking landscape were carved up and matched with rivals, often at the behest of regulators.
The Swiss government said it would provide more than $9 billion to backstop some losses that UBS may incur by taking over Credit Suisse. The Swiss National Bank also provided more than $100 billion of liquidity to UBS to help facilitate the deal. (…)
The bank faced as much as $10 billion in customer outflows a day last week, according to a person familiar with the matter. (…) “The acceleration of the loss of trust and the worsening of the last few days made it clear that Credit Suisse cannot continue to exist in its current form,” he said.
Regulators also worried that Credit Suisse’s failure could make Switzerland a new source of contagion for global stress. Hours after the UBS deal, a group of central banks, including the Federal Reserve and the Swiss National Bank, announced an expanded dollar swap line, a type of international lending operation. They called the expansion “an important liquidity backstop to ease strains in global funding markets.” (…)
A forced marriage of the two titans of Swiss banking was something UBS had never wanted. Credit Suisse had a laundry list of scandals and problems. Its big investment bank was the opposite of the “capital light” model UBS had been fashioning for years—one built around earning fees for managing the finances of rich clients.
But other parts of it were attractive: It is UBS’s chief rival in the local Swiss banking system. A merger of the two in other times might have seemed like an impossibly monopolistic combination. The Swiss authorities granted UBS a waiver.
And Credit Suisse has a cache of rich wealth-management clients in Asia that dovetails with UBS’s similar business and ambitions there. (…)
An earlier UBS proposal to pay around 1 billion Swiss francs, or around $1.1 billion, was eventually lifted to 3 billion francs, paid in UBS shares. Still, that is less than half of Credit Suisse’s last traded market value on Friday.
Also bearing big losses will be holders of $17 billion worth of Credit Suisse “additional tier 1” bonds, which are securities that look like bonds of a bank until the bank gets in financial trouble, at which point they become worthless. (…)
An end to Credit Suisse’s nearly 167-year run marks one of the most significant moments in the banking world since the last financial crisis. (…)
Unlike Silicon Valley Bank, whose business was concentrated in a single geographic area and industry, Credit Suisse is a global player despite recent efforts to reduce its sprawl and curb riskier activities such as lending to hedge funds. (…)
After swallowing Credit Suisse, UBS’s balance sheet will rival Goldman Sachs Group Inc. and Deutsche Bank AG in asset size. (…)
- And Now, a Credit Suisse Bailout The weekend shotgun marriage with UBS shows how post-2008 regulation failed again.
(…)In the biggest insult to the market, regulators will allow this deal to proceed without a vote of either bank’s shareholders. (…)
As for UBS shareholders, they’re now being punished for the discipline they imposed over the years to turn UBS into a healthy bank by being saddled with managing a failed rival. They also face more regulatory scrutiny and compliance costs now that their bank has grown far bigger. Congrats.
Authorities justify all this by highlighting the systemic risk in Switzerland and beyond of allowing Credit Suisse to collapse into bankruptcy. That danger is debatable. Credit Suisse was an outlier even in a week that saw bank stocks sell off around the world, meaning investors may have seen limited contagion risk. A European Central Bank official Thursday said no eurozone bank was imperiled by Credit Suisse’s travails, and media reports suggested counterparties were taking steps to limit their exposure.
Wasn’t eliminating the systemic risk posed by larger banks the point of beefed up regulation after the last panic? Credit Suisse boasted healthy capital-adequacy and liquidity ratios under post-2008 banking rules, and it had completed or was in the process of preparing “living wills” with regulators around the world to manage an insolvency. Those plans didn’t contemplate a forced sale to an unwilling rival, yet that’s the fix officials reached for in the pinch—as they always do, with ample taxpayer cash to sweeten the deal.
This weekend’s rescue is a warning that two weeks into the current banking panic the post-2008 rule book already has failed. Taxpayers are on notice that the solution to any crisis will be to amplify too-big-to-fail rather than reducing it—as it was the last time around. Hang onto your wallets.
- First Republic Set to Extend Record Loss as S&P Downgrades Again
- French insurer AXA has about $640 mln exposure to Credit Suisse
- Credit Suisse Bond-Wipeout Threatens $250 Billion Market Deal would write down more than $17 billion of the bank’s riskiest bonds
AT1 bonds—also known as contingent convertible bonds, or CoCos—were introduced after the financial crisis as a way to transfer banking risk away from taxpayers and onto bondholders. They also became a popular investment product that money managers and banks, including Credit Suisse, marketed to clients as a relatively safe way to boost yield on bond portfolios.
“What’s shocking is that it looks like equity holders will recover better than tier 1 bondholders,” said Justin D’Ercole, co-founder of ISO-mts Capital Management LP, a fund focused on bank securities. The resulting losses will likely prompt individual and institutional investors to sell similar securities of other European banks, he said. (…)
There are about $254 billion AT1 bonds outstanding and the securities are often banks’ most actively traded bonds because of their large size, according to data from Lazard Frères Gestion. (…)
Holders of CoCo bonds in Spain’s Banco Popular Español SA got wiped out in 2017 when the bank got bailed out through a merger with Banco Santander SA. (…)
The complete write-off by Credit Suisse, one of the largest issuers in the AT1 market, will likely hurt investor appetite for the bonds, fund managers said. It will also squeeze lending by banks, they said.
Ultimately, AT1 bonds will become more expensive for banks to issue, reducing their ability to make new loans, Mr. D’Ercole said. “That means banks will likely have to run smaller balance sheets,” he said.
Banking Mess Raises Recession Risks Main Street businesses and American families are likely to find it harder to get a loan because of turmoil in the banking industry, denting economic growth.
(…) Smaller banks are crucial drivers of credit growth, the fuel that powers the economy. Banks smaller than the top 25 largest account for around 38% of all outstanding loans, according to Federal Reserve data. They account for 67% of commercial real estate lending. (…)
Smaller banks are likely to respond by tightening standards and slowing lending to raise capital ratios, said Torsten Slok, chief economist at Apollo Global Management Inc., a private-equity firm. He said those moves would brace against the risks of more fickle depositors and volatile funding costs. (…)
Banks had begun tightening lending standards at the end of last year, as the sharp rise in interest rates made it harder to find creditworthy borrowers, and demand for commercial loans weakened, according to a Fed survey of senior loan officers. (…)
“There’s a pretty strong correlation between lending standards and unemployment,” he said.
Maybe not directly with unemployment but certainly on credit…
…and thus on the economy…
…back to the credit markets…
…at a rather inopportune moment, particularly for regional banks where CRE loans = 20% of assets (vs 7% for larger banks):
- “In 2008, there were asset problems,” said [former Goldman Sachs CEO Lloyd] Blankfein. “In the current market, it’s really people pulling out their deposits but the assets are, probably in the long run, money good.”
Unless we get a hard landing.
- Mike O’Rourke of JonesTrading (quoted by John Authers):
The prime concern of every bank for the immediate future is preventing deposit flight. It should be clear that the most expedient and effective solution to this crisis is an expansion and modernization of the FDIC deposit insurance regime. It has become vastly apparent that the banking industry and its regulators were not prepared for a banking crisis in the instantaneous information era. This is an era where the network effect of social media carries information and misinformation to hundreds of millions if not billions at the click of a button. Another click of a button allows depositors to instantaneously move funds.
- Easy to see why there is an exodus of commercial bank deposits – Bloomberg TV Charts
@TopdownCharts
FOMC WEEK
- Goldman Sachs:
We expect the FOMC to pause at its March meeting this week because of stress in the banking system. While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient. We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now.
This would mean taking a pause in the inflation fight, but that should not be such a problem. Bringing inflation back to 2% is a medium-term goal, which the FOMC expects to solve only gradually over the next two years. The inflation problem actually looks less urgent now than last summer because near-term inflation expectations have fallen sharply and long-term inflation expectations have remained anchored. Moreover, the link between a single 25bp rate hike and future inflation is very tenuous, the FOMC can get back on track quickly if appropriate, and the banking stress could have disinflationary effects.
In our central case, tighter lending standards resulting from the banking stress subtract ¼-½pp from GDP growth in 2023, equivalent to the impact of 25-50bp of tightening in our financial conditions index or 25-50bp of Fed rate hikes. The estimated impact is relatively moderate in part because lending standards had already tightened sharply in prior quarters due to widespread recession fears and in part because the multiplier effect should be low in an economy with excess demand for workers. However, the risks are tilted toward a larger effect and the uncertainty will likely linger for a while.
- MS bank analysts see a meaningful increase in funding costs ahead, which will lead to tighter lending standards, slower loan growth, and wider loan spreads. Ellen Zentner believes this raises the risk that a soft landing turns into a harder one.
- APOLLO: “Quantifying the impact of tighter financial conditions plus tighter lending standards, we estimate that the events this past week correspond to a 1.5% increase in the Fed funds rate.” [Slok]
(…) On Sunday afternoon, however, the Fed and five other central banks announced action to boost liquidity in US dollar swap arrangements by increasing the frequency of access to daily from weekly — echoing actions taken during other moments of crisis.
While US stock futures and Treasury yields climbed in the initial hours of trading following Sunday’s news, and investors increased bets on a quarter-point hike, several analysts said the risk-benefit calculations around a pause were becoming more favorable to such an option.
“The fact that you are engaged in global coordination with other central banking authorities to rescue institutions and keep liquidity flowing, it just suggests that a pause is probably a better risk/reward,” said Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed economist. (…)
“The higher risk of pausing also suggests higher risk that the FOMC would revise downward or suspend balance sheet runoff, especially if policymakers think recent stress sends a definitive signal of reserve scarcity at the aggregate, systemic level rather than only at the level of individual banks,” they [Monetary Policy Analytics] wrote. (…)
The Fed easing + credit tightening regime has been the weakest environment for equities.
BofA Quant (The Market Ear)
China Frees Up Liquidity in Sign of Wariness About Recovery The People’s Bank of China said it would cut the amount of cash banks must set aside as reserves, in a new push to stimulate growth and restore business confidence.
(…) The move wasn’t widely expected by economists, arriving days after official data showed China’s recovery broadly to be largely on track during the first two months of the year, led by strong consumption, while new home prices in major Chinese cities rose in February for the first time in more than a year. (…
At a press briefing Monday, China’s new premier, Li Qiang, acknowledged that achieving even 5% growth wouldn’t be easy this year, in part because of uncertainty in the global economic outlook. (…)
- Chinese Developer Evergrande Nears Landmark Restructuring Deal China Evergrande Group, the property giant that defaulted on its U.S. dollar bonds more than a year ago, is close to striking a debt-restructuring deal with foreign bond investors.
The Guangzhou-based developer, the most indebted property company in the world, has agreed on the outlines of a deal that would give it breathing room by extending its debt maturities while allowing it to defer some coupon payments, the people said. (…)
Evergrande won’t pay investors back immediately but will swap their bonds for several newly issued ones, including bonds secured by shares of its Hong Kong-listed businesses such as its property-services arm and its electric-vehicle division.
Investors would also be offered new unsecured bonds with maturities as long as 12 years in the future, paying coupons as high as 9%, the people said. Evergrande would be able to give investors more bonds instead of making these coupon payments, the people said, meaning it won’t suffer the burden of paying interest immediately after a deal is signed. (…)
A $4.68 billion bond due in 2025 was bid at 8 cents on the dollar on Friday afternoon in Hong Kong, according to Tradeweb. (…)
- China’s Housing Prices Show Signs of Stabilizing Continued policy-easing signals and an end to Covid restrictions have put a floor under the sector
New home prices in 70 large Chinese cities rose 0.29% in February from the prior month, according to the calculations by The Wall Street Journal based on data released Thursday by the National Bureau of Statistics.
The gain represents the first month-on-month increase since August 2021 and suggests Beijing’s efforts to support the beleaguered sector are starting to take effect. (…)
Official data released Wednesday showed Chinese home sales rising 3.5% by value in the combined January-February period from a year earlier, compared with a 28.3% year-over-year drop for the full year of 2022. (…)
New construction starts by China’s property developers fell 9.4% on year in January and February, compared with a 39.4% fall recorded for the entire prior year.
The official data released Thursday showed that just 13 of the 70 cities tracked by authorities saw month-on-month home-price declines in February, a sharp decline from January’s 33 cities.
When compared with a year earlier, average new home prices in the 70 surveyed cities fell 1.86% in February, narrowing from January’s 2.26% year-over-year drop. In year-over-year terms, 54 of the 70 cities saw new home price declines in February, roughly the same as January’s 55 cities, the data showed.