European and American bank stocks staged a roller coaster, the market expects the pace of interest rate hikes to slow down

With the bankruptcy of Silicon Valley Bank in the United States spreading and Credit Suisse in Europe suffering a crisis of confidence, the European and American banking industries in the midst of stock price turmoil and deposit outflow crisis have made many investors around the world anxious. The hit First Republic Bank of the United States, the US stock market plunged more than 36% before the market yesterday.

The Office of the Chief Investment Officer (CIO) at UBS Wealth Management has issued an institutional opinion that concerns about banks' solvency are excessive, while most banks maintain strong liquidity positions.

In the face of difficulties, relevant banks and national regulators are also taking measures to deal with it. Yesterday, Credit Suisse said it would raise 50 billion Swiss francs (about 370 billion yuan) from the Swiss National Bank's liquidity facility. Spurred by this, Credit Suisse European shares rose to 40%.

Credit Suisse shares plunged sharply

The shock wave caused by the bankruptcy of Silicon Valley Bank in the United States continues, and the European banking industry has been led into a new round of turmoil by Credit Suisse, which has been exposed to new problems due to long-term financial constraints.

On March 16, the official website of Credit Suisse International announced that Credit Suisse plans to exercise the option to provide full collateral with high-quality assets under the secured loan facility and short-term liquidity facility to borrow up to 50 billion Swiss francs from the Swiss National Bank. In addition, Credit Suisse also announced that Credit Suisse International will launch a cash offer repurchase of senior debt securities of several operating companies, with a maximum scale of about 3 billion Swiss francs.

Credit Suisse said it had made a cash tender offer for 10 senior debt securities denominated in US dollars for a total consideration of up to US $2.50 billion. In addition, it will make a separate cash tender offer for four senior debt securities denominated in euros for a total consideration of up to 500 million euros.

Affected by this news, Credit Suisse's European shares rose to 40% yesterday, the largest increase on record; its US stocks soared by more than 20% before the market, but then the gains narrowed.

The Swiss National Bank and the Swiss Financial Marekt Supervisory Authority (FINM) recently issued a joint statement saying that there is no indication that the Swiss Financial Institution Group is facing the risk of direct contagion caused by the turmoil in the US banking market. Credit Suisse complies with the capital and liquidity regulations of systemically important banks and will provide Credit Suisse with additional liquidity if necessary.

The move comes after Credit Suisse said in its annual report published on March 14 that it had identified "material deficiencies" in its reporting procedures for fiscal 2022 and 2021 related to a failure to design and maintain effective threat and risk assessments in its financial statements and was taking remedial action. The report triggered a plunge in Credit Suisse's shares on March 15, which also hit European banking stocks at one point.

Institutions: Market Excesses

Concerns about bank solvency

Sentiment among European banks has soured following the collapse of Silicon Valley Bank in the US, with bond markets predicting a dovish monetary policy. German, Swiss and US two-year bond yields fell 48, 35 and 36 basis points respectively.

However, on March 16 local time, the European Central Bank held a policy meeting and still announced a 50 basis point interest rate hike. The Swiss and US central banks will make interest rate decisions next week.

The reporter learned from UBS that following the recent collapse of Silicon Valley Bank and Signature Bank, investors are struggling to think about three related but distinct issues: bank solvency, liquidity, and profitability.

"In short, we believe that concerns about bank solvency are overblown, with most banks maintaining strong liquidity positions." As a result, the vast majority of institutions' depositors remain protected, UBS notes. However, if funding conditions remain tight for an extended period and profitability challenges in the sector increase, a few individual banks may need central bank liquidity support.

Some market participants told reporters bluntly that the collapse of Silicon Valley Bank was a casualty of the fight against inflation by many central banks, which also hinted that interest rate hikes often have a lag effect.

The collapse of Silicon Valley banks does not mean there will be a global credit crunch, as a lack of diversification and weak risk management are not characteristics of the entire banking industry, said Aaron Sai, senior multi-asset strategist at Pictet Asset Management in Switzerland.

Central banks are also currently considering the impact of further interest rate hikes on the stability of the financial system, and may slow the pace of interest rate hikes. "Quantitative tightening in the United States [central bank cuts in bond portfolios] will end earlier than previously expected." The team at Pictet Asset Management Yalen expects that the Federal Reserve may raise interest rates by 25 basis points, but does not rule out that the Federal Reserve will keep interest rates unchanged in March.

Today, global central banks face a dilemma. After a year of aggressive interest rate hikes, economic growth and inflation in the United States and Europe remain more resilient than expected. February data on new jobs and consumer price inflation in the United States exceeded expectations. Therefore, until last week, the policy focus of major central banks was still on curbing inflation rather than worrying about the adverse impact of interest rate hikes on economic growth.

According to Standard Chartered analysis, the Federal Reserve and the European Central Bank must take steps as consumer price inflation remains high. Its future interest rate hikes may be smaller than previously expected, and may even put the interest rate hike cycle on hold until the banking turmoil subsides.