1. Banks in trouble 

A series of bankruptcies of US regional banks coupled with the stress on Credit Suisse (a systemically important bank) have sent shockwaves across the global financial markets.  

1.1. Series of bank failures in the US 

• 9-Mar-23: Liquidation of Silvergate bank following months of financial troubles (including a bank run in Q4 last year) stemming from the crypto winter 
• 10-Mar-23: Closure of Silicon Valley Bank as a result of a bank run stemming from loss of confidence due to its large exposure to long-term US treasury bonds and Mortgage-Backed Securities (that have lost significant value amidst the non-stop interest rate hikes). 
• 12-Mar-23: Closure of Signature Bank New York as a result of a bank run stemming from concerns over the bank’s exposure to crypto 
• 16-Mar-23:  America’s biggest bank deposited $30b with First Republic Bank to ease fears that the regional lender would be the next to fall 

1.2. Turmoil at Credit Suisse 

Share price collapsed on Wednesday and Credit Suisse had to be rescued by the Swiss central bank.

• Credit Suisse’s 2022 Annual Report identified “material weaknesses” in internal controls over financial reporting. 
• Saudi National Bank (Credit Suisse’s top shareholder) said it could not provide more support because of regulatory constraints. 
• Following the chain of bank failures in the US, Credit Suisse was forced to borrow an emergency $54b from the Swiss Central Bank to shore up liquidity. 
• Share price continues to plummet alongside confidence in the Swiss banking sector. Credit Suisse is cheap now, but it’s cheap for a reason. Will UBS be willing to swallow the significant troubles plaguing Credit Suisse? Or will it be forced into a merger to restore confidence? After all, unlike SVB or SBNY which are regional banks, Credit Suisse is one of the 30 banks worldwide deemed to be “too big to fail”. 

Credit Suisse was already troubled with a string of scandals highlighting deficiencies in risk management and internal controls.

• Jun-22: Convicted of failing to prevent money laundering by a Bulgarian cocaine trafficking gang.
• Feb-22: A massive leak from Credit Suisse exposed the hidden wealth of clients involved in torture, drug trafficking, money laundering, corruption, and others.
• Oct-21: Bank pleaded guilty to defrauding investors in connecting with an $850m loan to Mozambique meant to pay for a tuna fishing fleet.
• Mar-21: Lost $5.5b when Bill Hwang’s Archegos Capital defaulted after its highly leveraged and oversized technology bets went south.
• Mar-21: Greensill Capital collapsed after Credit Suisse sold billions of dollars of Greensill bonds to its investors by convincing them that the high-yield notes were extremely safe.

Beyond scandals, S&P also Downgraded Credit Suisse’s issuer rating to BBB- in November 2022. Top bankers across Credit Suisse were also leaving as bonuses were cut and delayed. 

1.3. More banks at risk? 

Even in Singapore, the common consensus seems to be that the slew of bank failures is unlikely to be over. I imagine that fear must be rampant across the depositors of smaller US regional banks.

Natixis research plotted some US banks to visualize their risks after the slew of bank collapse, as seen below.

2. The Fed’s dilemma – Market seems to be pricing in a +0.25% rate hike 

While inflation continues to cool (CPI +6% YoY and +0.4% MoM), it remained far above the Fed’s target. Fed Chair Jerome Powell announced that inflation was still far too high and that rates could rise more than expected. 

On one hand, the Fed needs to continue monetary tightening to combat inflation. Yet, on the other hand, it needs to slow pace of rate hike to maintain financial stability and ensure there’s no bigger breakdowns within the economy. Such a balance is an art, and who knows how this will be managed especially since inflation continues to persist despite multiple rate hikes and that signs of the economy breaking down is already in sight.  

Analysts from Nomura have changed their rate hike expectation to -0.25% from +0.50% while Goldman and Barclays have adjusted to +0%. Wall Street’s consensus seem to be a +0.25% rate hike, nonetheless. Next week’s FOMC is one to keep a lookout on. Bank of England, Swiss National Bank and Norges Bank will also be having meetings next week.   

Note that the ECB have responded to this dilemma by pressing ahead with a +0.50% hike, in line with guidance given in February. The ECB clearly did not see recent market volatility as a strong enough reason to change its original intentions. 

3. Flight to safety via gold

The series of bank failures triggered a wave of market sell-off on risky assets. Even investment grade credit funds (dollar denominated) saw a $4b net outflow this week.

Precious metals like gold are now fulfilling its mandate as a safe haven amidst the banking crisis, leading to higher demand and prices (though a slightly weaker USD and dip in yields also contributed). Spot gold jumped to US$2,001/oz from around US$1,800ish/oz in early March [Source]. This is the highest since August 2020. Gold is likely to continue rallying until fears of the financial system abates. As a benchmark, gold hit US$2,069/oz during the aftermath of the Ukraine invasion before subsiding as the situation stabilized. 

It is an interesting situation because if the Fed continues to hike interest rates, it may cause something bigger to breakdown in the future. If that happens, more fear will arise and lead to higher demand for gold and resulting in gold prices to rise. Yet, if the Fed decides that persisting inflation is not going away with interest rate hikes, and instead decides to pivot by cutting interest rates to ensure stability of the financial system, this will also cause gold to appear more attractive (since it doesn’t yield interest) and hence increase in gold prices. Either way, monitoring gold amidst central bank meetings next week does seem compelling.

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