Another brick from the wall
DOES NOT CONSTITUTE INVESTMENT ADVICE, INCLUDING, BUT NOT LIMITED TO, INDIVIDUAL INVESTMENT ADVICE
On May 1, 2023 the rumours about the not-so-good financial situation of the bank called First Republic become reality. The Federal Deposit Insurance Corporation announced the deal in which JPMorgan acquired all the assets and almost all the liabilities of First Republic. Technically, it looked like the purchased of the bank itself from the FDIC for 10,6 billion usd. In addition, the FDIC will cover losses for approximately 13 billion usd.
We consider the news to be extremely important for both the US and EU economies, however, since the EU lacks a harmonised budget center and tax system, it is much more important for the Old World than for the US. In times of crisis, the US can raise taxes or print more money. In times of crisis EU, can do other things.
The issue of financial stability is a crucial thing for the growth and for the social happiness (see what happened in France when they hardened retirement terms; it is less imaginable if a big bank would be in trouble, hope it never happens). When UBS recently acquired CS in a non-cash transaction, the question of financial stability in EU also been raised despite the fact that both UBS and CS are not in the EU. The logic here is simple: the financial world is a pretty well-connected swamp and the fall of one big player cannot be ignored by the others. In the case of CS, it was far more important that the size of the problems is expected to be more than 50B euros and regulators decided to write-off convertible bonds in an unexpected and unpopular decision.
Connecting the dots may be a simplistic and misguided way of thinking, but we cannot ignore the fact that the size of potential problems in EU banks may be even more important for the EU than for Switzerland.
While Switzerland de facto allowed the second largest and one of only two global systemically important banks to fall, we are waiting for the European Central Bank to comment on the situation in its own backyard. Today’s decision by the ECB to raise interest rates by 0.25 percentage points marks a new high in rate hikes and makes the situation even worse. It’s hard to realise, but rates have been below 0% since 11 June 2014 until 27 July 2022 (more than 8 years!) and were raised from -0.5% to 3.25% in less than a year.
Fortunately, the regulator was open and frank in telling the markets that there was no “direct read-across from events in the United States to banks in the euro area“. But that was before the First Republic collapsed. Ok, probably their response would be the same – unlike the New World, Europe doesn’t do much innovation, doesn’t play the “pledge your share of a no-revenue company” game, and does more scrutiny of the banking sector. However, we do not understand being walked through the forest of generalities (such as “Based on our assessment, the overall picture of the banking sector is not a cause for concern. Supervisors scrutinise each bank’s balance sheet, and this scrutiny has not led to any concerns in this respect“), how the risks of EU banks differ from similar banks in Switzerland.
We still see the banking sector as one of the biggest risks to the EU economy. We still do not see any interesting ideas in the banking sector for our portfolios and remain strongly bullish on the euro as a currency.