Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: Today's guests are Amelia Pollard, who covers distress stept markets
Speaker 1: for Bloomberg News in New York. She's oh all over
Speaker 1: the big credit stories at the moment and we're delighted
Speaker 1: to have her on the show. Thanks so much for
Speaker 1: having me. We're also very pleased to welcome Arnold Kakuda,
Speaker 1: who covers banks for Bloomberg Intelligence in New York, and
Speaker 1: Yuron Julius, who has the same responsibilities but it is
Speaker 1: based in London. Hi, James Loo, great to be here.
Speaker 1: Banking is the hot topic at the moment. We'll be
Speaker 1: getting to their insight in a little bit, but before
Speaker 1: we do, Amelia Pollard with Bloomberg News, it's been a
Speaker 1: roller coaster ride for banks. What's going on? We've had
Speaker 1: a bit of a regional banking crisis in the US.
Speaker 1: Can you walk us through what happened though? Yeah, it's
Speaker 1: been a crazy week. It started last week with silver
Speaker 1: Gate Capital, which is known as you know, the big
Speaker 1: bank to crypto. It counted FTX among its biggest clients.
Speaker 1: And so there were mounting concerns about silver Gate early
Speaker 1: last week, and then on the Wednesday announced that it
Speaker 1: was going to do a voluntary wind down. So it
Speaker 1: didn't technically count as a bank failure by the FDIC's
Speaker 1: definition of when a bank has to fall into FDIC
Speaker 1: receivership and the federal agency effectively takes over the bank,
Speaker 1: but by you know, it failed in the sense that
Speaker 1: it you know, ceasing operations. And then just the next day,
Speaker 1: on last Thursday, trouble started for a Silicon Valley bank,
Speaker 1: which was another of these banks that had become highly
Speaker 1: specialized in one sector. It started in nineteen eighty three
Speaker 1: and ever since then really has been the bank for
Speaker 1: venture capitalists and the tech sector specifically startups were their
Speaker 1: main clients, and rumors started to fly in the tech
Speaker 1: world that the bank wasn't as sound as it had
Speaker 1: previously indicated, and that was in part because it was
Speaker 1: stuck in these long dated treasury bonds and was trying
Speaker 1: to unwind from them and raising fresh capital as a result,
Speaker 1: and so a real true bank run ensued and all
Speaker 1: of these tech startups and venture capital funds started to
Speaker 1: pull their money. It was later reported that a total
Speaker 1: of forty two billion dollars was attempted to be pulled
Speaker 1: from the bank last Thursday, and the next day around
Speaker 1: you know, eleven thirty am New York time, it fell
Speaker 1: into FDIC receivership and was ultimately the second biggest bank
Speaker 1: failure ever and the biggest one since Washington Mutual in
Speaker 1: two thousand and eight. So that rocked markets. A bunch
Speaker 1: of other regional banks, including First Republic, then started their
Speaker 1: chairs plummeted, their trades were halted a few times last Friday,
Speaker 1: and then a few days later. The saga continued on
Speaker 1: Sunday when Signature Bank fell into FDIC receivership. Signature Bank
Speaker 1: is based in New York, so it was no longer
Speaker 1: a California story. Silver Gate Capital and Silicon Valley Bank
Speaker 1: were both based in California, and you know, it was
Speaker 1: the second bank to fall into failure within a week
Speaker 1: in FDIC receivership. So we've been all reeling from that
Speaker 1: here on the market team, and you know, the distress
Speaker 1: team has been trying to track how far the fallout
Speaker 1: will reach in terms of regional banks. But the federal
Speaker 1: government denounced they were going to backstop not only the
Speaker 1: insured limit of the two hundred three thousand dollars deposits,
Speaker 1: but you know, make all depositors whole. So nine over
Speaker 1: ninety percent of the Silicon Valley bank depositors were over
Speaker 1: that two hundred thousand dollars threshold. So that I think
Speaker 1: really kind of short up confidence for the time being
Speaker 1: in the banking sector. But there's been some volatility this
Speaker 1: week even still, we haven't seen banks like this failed
Speaker 1: since the financial crisis the two thousand and eight. Is
Speaker 1: this a Lehman moment? You know, earlier this week we
Speaker 1: said it wasn't the Lehman moment, but then you know,
Speaker 1: Credit Swiss stap and some you know, distress trading started
Speaker 1: yesterday for some other credit swee sponse. By all metrics,
Speaker 1: it doesn't seem to be a Lehman moment, you know.
Speaker 1: I think that the fact that the FED stepped in
Speaker 1: so quickly in backstopping those deposits has for now calmed out,
Speaker 1: calmed down investors and you know, just those with bank
Speaker 1: accounts everywhere and not pulling their funds. I think it
Speaker 1: is people are still bracing though, to see how this
Speaker 1: shakes out in the coming weeks. But it seems some
Speaker 1: there's been some comparison from a few investors to Bear
Speaker 1: you know, this might be a Bear Stearns moment, which
Speaker 1: actually failed exactly this week in two thousand and eight,
Speaker 1: So there's some odd parallels there with timing. So you
Speaker 1: mentioned Credit Swiss, that's a much bigger issue potentially a
Speaker 1: huge Swiss bank with sprawling global businesses that bonds fell
Speaker 1: into distress, they keep getting more distressed credit defaults. Who
Speaker 1: helps and play a high high chance of default even
Speaker 1: after the Swiss National Bank through them a lifeline. What's
Speaker 1: the story there? You know, it's a tenuous connection between
Speaker 1: what's happening in the US regional banks and what's happening
Speaker 1: with Credit Sweets. But I think it's a sentiment of
Speaker 1: their being kind of concern globally among investors and especially
Speaker 1: you know, after the regional banks started to tumble last
Speaker 1: week in the US, we were starting to see, you know,
Speaker 1: shares among European banks even we're starting to fall, and
Speaker 1: I think that was a kind of a harbinger for
Speaker 1: what was to come this week with Credit Sweets. I
Speaker 1: think the fact that bonds are still trading in the
Speaker 1: distress level today and are falling again even after the
Speaker 1: Swiss National Bank backstopped the bank and said that they
Speaker 1: would provide fresh liquidity. Is a sign that the story
Speaker 1: is not over here, but it is too soon to
Speaker 1: tell exactly how Credit sweece will play out on coming days.
Speaker 1: Very interesting, Ameliapole of Bloomberg News, thanks so much for
Speaker 1: joining us. This is a fascinating story with broad implications,
Speaker 1: and we look forward to reading all of your scoops
Speaker 1: on the Bloomberg terminal and of course at Bloomberg dot com.
Speaker 1: Thanks so much, James. Switching gears here a bit. As
Speaker 1: I mentioned earlier, we're very fortunate to have Arnold Kakuda
Speaker 1: and Uron Julius from Bloomberg Intelligence who really know this sector. Well.
Speaker 1: We're looking forward to hearing your take. I'll start with Yuron,
Speaker 1: since Europe is really the kind of epicenter here, that's
Speaker 1: where Credit Swiss is based. What's the situation right now?
Speaker 1: How is the crisis playing out? Well? Thank you, James.
Speaker 1: That is that is a big question that we're all
Speaker 1: trying to get to get an answer to. It is
Speaker 1: still it is too soon, i think too to be
Speaker 1: definitive about how is this going to play out? The
Speaker 1: Swiss Central Bank has come in and provided Credit Swiss
Speaker 1: with access to a liquidity facility, to two liquidity facilities
Speaker 1: in fact, will buy credit Suite some time. Will it
Speaker 1: be enough? We don't know. The amount mentioned is fifty
Speaker 1: billion in total. You know, the look that number may
Speaker 1: have been plucked out of thin air. It looks you know,
Speaker 1: it's a serious enough number. Is it large enough? Had
Speaker 1: they decided on a few hundred billion, uh, you know,
Speaker 1: that would have been perhaps too large. And also you
Speaker 1: know this is a collateralized facility, so credit suites that
Speaker 1: needs to have the the the assets to pledge against
Speaker 1: this this liquidity that it will take from the Swiss
Speaker 1: National Bank. But but look, you know, the early response
Speaker 1: to this, to this provision of emergen liquidity has been positive.
Speaker 1: But it does seem to be fizzling out a little bit.
Speaker 1: And if we take a step back, you know, what
Speaker 1: is that issue here? The immediate crisis It was triggered,
Speaker 1: triggered by Silicon Valley Bank, the reader cross. I totally
Speaker 1: agree with Amelia. It's the the read across asilit Valley
Speaker 1: Bank for a credit suis isn't all that immediate because
Speaker 1: if you look at the unsecured lasses, sorry, unrealized lasses
Speaker 1: or bond portfolios. That wasn't really the issue for cred Swiss.
Speaker 1: The large majority of its securities are in its trading book.
Speaker 1: You know, these are marked to market, so that's not
Speaker 1: really the issue. I think what happened is that you know,
Speaker 1: Silicon Valley Bank, you know, unfolded and people started to
Speaker 1: worry about liquidity issues elsewhere. Forget about nuance. It was
Speaker 1: just you know where which banks have liquidity issues. And
Speaker 1: if you look at Credit Suis in the fourth quarter,
Speaker 1: it did see a massive outflow of client assets, you know,
Speaker 1: reflecting concern over its over its earnings, over its franchise.
Speaker 1: And at the same time the bank has announced this
Speaker 1: huge restructuring, So you know, I think it's important to
Speaker 1: realize that that there are some parallels, but it isn't.
Speaker 1: It isn't the same story as what played out in
Speaker 1: for Silicon Valley Bank. But look to hard to be
Speaker 1: as I mentioned, how to be definitive, how this is
Speaker 1: going to this is going to play out. Ultimately, what
Speaker 1: you need to see is sentiments starting to stabilize, spreads
Speaker 1: starting to stabilize um and we're not seeing that yet.
Speaker 1: It's a huge institution, has counterparties across the board in
Speaker 1: all sorts of markets, and you know structured finance and
Speaker 1: investment banking and just about you know, every asset class
Speaker 1: you can think of. What impact is it having across
Speaker 1: Europe at this point, Well, all European banks are done
Speaker 1: clear clearly, everyone's very jittery and wondering, you know what
Speaker 1: what's going on? What is the read across for for
Speaker 1: for the entire sector. But U I think sentiments should
Speaker 1: sort of stabilize. If you look at the risk to
Speaker 1: liquidity and then specifically the risk of deposited outflowers. The
Speaker 1: vast majority of European bank deposits they are in shirt, right,
Speaker 1: so sixty three of deposits are in short according to
Speaker 1: EBA data. If you look at the deposit mix, the
Speaker 1: last majority of European banks deposits are retail, so stickier arguably,
Speaker 1: and those two metrics they contrast with what you saw
Speaker 1: that Silicon Valley bank. So I think that's that's important.
Speaker 1: I think overall it's also important to realize that European
Speaker 1: banks are very much regulated, very very tightly, at least
Speaker 1: the large ones, particularly a bank like credit suites believe
Speaker 1: it or not. As a global stemically important bank, it
Speaker 1: has had much more regulatory oversight and intrusion than perhaps
Speaker 1: some of the small to medium sized banks in the
Speaker 1: over in the US. But that's you know, that's not
Speaker 1: to to to play to be diminished the challenge because
Speaker 1: if you look at what happened to the deposit base
Speaker 1: in the fourth quarter, it did actually drop, It did
Speaker 1: actually come down by four percent, and more may follow.
Speaker 1: And that reflects two things. It reflects the cost of
Speaker 1: living crisis. Some depositors, you know a lot of clients
Speaker 1: they are using their savings to to help them through
Speaker 1: this difficult period. It also reflects depositors taking their money
Speaker 1: out of their savings accounts and taking them into money
Speaker 1: market funds, so higher yielding alternatives and those two drives
Speaker 1: they remain in players. And I do think that you
Speaker 1: may see some further deposit outflows in the coming in
Speaker 1: the coming months and quarters. But it's all it's all
Speaker 1: coming from from a healthy base. Don't remember, they don't
Speaker 1: forget that. You know, banks deposit they shot through the
Speaker 1: roof during the pandemic and that's coming off now. So yeah,
Speaker 1: the high rates hadn't been good for banks. Um, well,
Speaker 1: the concerns of you was that that higher rates were
Speaker 1: supposed to be good for banks, and in some ways
Speaker 1: they are. You know, they do allow banks to earn
Speaker 1: a greater higher marginal their lending. And you know, that
Speaker 1: was the thinking that interesting incomes should should benefit and
Speaker 1: if you look at the recent results, that's exactly what happened.
Speaker 1: That interesting most European banks has gone up, in some
Speaker 1: cases massively. But there's also realization that higher rates come
Speaker 1: with lower marks on your on your boob porfilio and
Speaker 1: you know that, you know that there's one aspect. And
Speaker 1: now with those deposit outflows, the realization has now hits
Speaker 1: that banks will have to pay up for those deposits
Speaker 1: to hang onto those deposits, so that will eat into
Speaker 1: margins and that will sort of be a bit of
Speaker 1: an offset. But overall, net net, I still think that
Speaker 1: higher rates are positive for European banks banks in general. Okay, great,
Speaker 1: you're in, Thank you so much. And Arnold from your
Speaker 1: that's Devnaldcuda bug Intelligence in New York. What's the moods
Speaker 1: over in the US right now? How scared should we
Speaker 1: be about the bank? So will others fail? Yeah? I
Speaker 1: mean the mood is very yeah, like uncertain and scary.
Speaker 1: Um you know, Silicon Valley bank signature, these are both
Speaker 1: IG names and then um, you know, in hispan of
Speaker 1: one to two days, they went from IG to um
Speaker 1: bus right, so uh, definitely concerns. And then um, you
Speaker 1: know it was seen as kind of the bigger banks,
Speaker 1: like the JP Morgan's via bas kind of they could
Speaker 1: benefit more from potential deposit outfloor or inflow from some
Speaker 1: of these regionals. But then we get like a credit
Speaker 1: swist where okay, you know, something were to happen there
Speaker 1: you know, definitely a lot of counterparty risks. So definitely
Speaker 1: a lot of concern in the bank financial space given
Speaker 1: you know, contagion or you know, who's next kind of thing.
Speaker 1: So um physicum metrics that we look at, at least
Speaker 1: on the spread side are financials versus the overall bond index,
Speaker 1: and um, you know kind of before this uh turmoil,
Speaker 1: um banks, Uh, financials, let's let let's use the financial
Speaker 1: sector as a proxy, had almost traded flat to the
Speaker 1: corporate bond index. But then given how you know, the
Speaker 1: Silicon Valley bank failure as well as you know, credit
Speaker 1: Swiss volatility, has happened, you know, just within a span
Speaker 1: of a week. You know, now now the financial sector
Speaker 1: is about twenty five wider than the overall UH corporate
Speaker 1: bond sector. So definitely a lot of jitters going on
Speaker 1: right now. Just um you mentioned earlier IG just for
Speaker 1: listeners who may not be where that means investment grade,
Speaker 1: which um, the bonds of credit Swiss still actually are,
Speaker 1: even though the trading like distressed junk today. UM. So
Speaker 1: that's that's an interesting feature of the market. But but
Speaker 1: you mentioned, you know that maybe others in trouble. I mean,
Speaker 1: is there going to be widespread contagion? What are the
Speaker 1: weakest links here? I mean, you know, even now there's
Speaker 1: concerns with a First Republic h bank, which is uh
Speaker 1: they only have about eight hundred million of of of
Speaker 1: UM subordinated debt, which are which are well they were
Speaker 1: IG until two days ago UH and there togo UM
Speaker 1: before the rating agencies pick it down to UM high
Speaker 1: yield UM. But yeah, it's these models where they're you know,
Speaker 1: as eurone had talked about a lot of uninsured deposits
Speaker 1: right a high high level of balances, so um, it
Speaker 1: could be that you know, when there's a lot of
Speaker 1: uncertainty with Silicon Valley Bank unless say the Friday and
Speaker 1: there was a concern where uninsured depositors would not be
Speaker 1: made whole. That's when you know people got concerned and
Speaker 1: they might have already moved their money. And so you
Speaker 1: know what what the FED and the FDAC the regulators
Speaker 1: have done is to implement some measures to kind of help.
Speaker 1: But you know, if if the bank run, if deposits
Speaker 1: run out so fast that they overwhelm kind of the
Speaker 1: the liquid security PO portfolios at these banks do you
Speaker 1: have and which have gained a lot of unrealized losses, right,
Speaker 1: it might overwhelm that. So you know, it might be
Speaker 1: too late. And that's I think that situation happened at SBB.
Speaker 1: So um yeah, and it's ironic that all this stuff
Speaker 1: is ahead of a potential recession. And you know that's
Speaker 1: where we kind of delve into, um, you know what's
Speaker 1: gonna happen to the loan portfolios as the economy gets hours,
Speaker 1: Consumers are impacted, business are impacted, and then that's when
Speaker 1: you start seeing loan losses. But you know where the model,
Speaker 1: you know, the market is currently concerned with, um, these
Speaker 1: models where they have a lot of unsecured deposits, and
Speaker 1: then they invested in bond a big bond portfolio, sovereign
Speaker 1: bond portfolio or agency mbs triple A rated securities that
Speaker 1: have accumulated losses and um and and the accounting for
Speaker 1: these regional banks is, you know, those unrealized losses, they
Speaker 1: didn't hit capital levels. So it's a confluence of you know,
Speaker 1: deposits not being sticky where they thought they were liquid
Speaker 1: acid it's not really being liquid because you know, banks
Speaker 1: didn't want to sell it for losses. And then lacks
Speaker 1: accounting rules for these kind of mids of small sized
Speaker 1: regional banks where they didn't have to account for those
Speaker 1: unrelifed losses in their capital levels. I think we should
Speaker 1: really time stamp this conversation because things are moving so quickly.
Speaker 1: This is much sixteen eleven fifty in the morning in
Speaker 1: New York. Anything could happen. But I would like to
Speaker 1: ask both of you, your Ron first, and then Arnold,
Speaker 1: same question I asked Amelia earlier. Is this a Lehman
Speaker 1: moment for for banks and for the economy. Let's start
Speaker 1: with your un what's your view? No, I don't think so.
Speaker 1: I think you know banks globally and European banks you know,
Speaker 1: of course, those are the ones that I that I
Speaker 1: look at the daily basis. The overside, the regulation, regulatory
Speaker 1: framework has been tightened so much since then, um, since
Speaker 1: since the two thousand and eight and before, so it's
Speaker 1: it's you are looking at a completely different UH sector. UM. Now,
Speaker 1: undoubtedly there are many challenges ahead of us, but UM,
Speaker 1: I'm confident that ultimately, you know, the strength the resilience
Speaker 1: of the of the regulatory framework should prevent a Leman
Speaker 1: type scenario playing out. I mean, I agree, it's a
Speaker 1: it's a no for me on Leman, but I would
Speaker 1: have you at that with I think we need uh
Speaker 1: more regulation coming into play. But also I think, UM,
Speaker 1: I think we need more of an explicit maybe deposit
Speaker 1: guarantee for uninsured deposits, you know, for like a period
Speaker 1: of a year or two, uh, just given given the
Speaker 1: volatility of the market. And and I think the thing
Speaker 1: that we can point to is during the financial crisis
Speaker 1: October two thousand and eight, we had that tg T
Speaker 1: LGP Treasury Liquidity Guarantee program and as a part of that,
Speaker 1: UM non interest sparing deposits were guaranteed for over a year, right,
Speaker 1: So when when when when the market psyche is is
Speaker 1: a little hectic and people just move deposits will um
Speaker 1: on maybe some um insignificant news, maybe that sort of
Speaker 1: thing is necessary, right, And so even though we've gotten
Speaker 1: these deposits uninsured deposit um were made whole after these
Speaker 1: you know, signature and SEB when it's a receivership, maybe
Speaker 1: that's what's needed to kind of explicitly say to everybody
Speaker 1: you don't need to move your deposits out of regional
Speaker 1: banks into the bigger banks. So I think a couple
Speaker 1: of things might be needed just to maybe calm the
Speaker 1: market sentiment. But yeah, that's that's why I think. Thank you.
Speaker 1: I hope you'll write that it's not a Leman moment.
Speaker 1: This is the biggest story in global finance right now.
Speaker 1: And you can read all of the analysis of banks
Speaker 1: by Arnold Kakuta and You're Newlius on the Bloomberg terminal.
Speaker 1: Thank you so much to you both, and thanks again
Speaker 1: to Amelia Lord from Bloomberg News. Read all of her
Speaker 1: scoops on the terminal and at Bloomberg dot com. Really
Speaker 1: important to keep an eye on that big bank credit
Speaker 1: story right now. No matter what part of the market
Speaker 1: you are in, Amelia and her team will continue to
Speaker 1: break a lot of news about that in the coming weeks.
Speaker 1: I'm James Crumby. It's been a pleasure having you. See
Speaker 1: you next week on the Credit Edge.