Central banks rush to prevent a confidence crisis


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While most people were relaxing over the weekend, financial institutions were working around the clock to come up with a solution for Credit Suisse Bank whose faith was in the balance. Sunday night the news came that UBS bought its troubled Swiss rival in an all-share transaction for 3 billion swiss francs (approx. 3 billion euro), a sizable discount from the closing price on Friday. While the whole details and implications of the deal are not yet clear, investors are asking themselves if it is not 2008 all over again. .

The UBS deal to take over Credit Suisse was overseen by the country’s central bank, the Swiss National Bank (SNB), and financial market regulator (FINMA). Both banks are among the 30 most significant globally. This comes just a week after the US authorities closed down Silicon Valley (SVB) and Signature (SBNY) Banks. The spread of bank contagion to Europe has unsettled markets.

But the situation looks to be more individual and less systemic. Banks mainly fail for two reasons: bad loans or funding issues. The former is what caused the financial crisis in 2008 — people couldn’t pay their mortgages, and the losses cascaded through the system. This looks not to be the issue right now. Rates have changed so much that banks have had trouble keeping deposits and managing their investment portfolios, getting into funding issues.

Regardless of the technicalities, every banking crisis is a confidence one. Therefore the immediate mission of the Fed, ECB, SNB and other Central Banks was to reestablish the trust in the system. The US Fed has provided 300 billion dollars of liquidity to the US banks, including 12 billion dollars from its new BTFP programme. The SNB gave over 150 billion dollars of support to Credit Suisse and rushed over this weekend to find a solution to the crisis. The ECB announced it stands ready if needed. China cut banks’ required reserve ratio to provide an extra 80 billion dollars in system liquidity. Also, the US’s largest banks provided 30 billion dollars deposits to regional lender First Republic (FRC).

The financial sector is important for Romanian investors, with over 76% of them having assets from this industry in their portfolios, according to the latest eToro Retail Investor Beat survey. The manner of UBS takeover at huge discount over recent Credit Suisse share price levels, is a reminder of authorities and regulators priorities and focus in such situations. Their first priority is to protect the broader financial system and depositors and not necessarily shareholders, investors or bondholders. The US Federal Reserve for example was set up in 1913 directly to protect the financial system, not to manage interest rates.

The legacy of the 2008 global financial crisis and 2010’s eurozone crisis is that European banks are now more tightly regulated, with higher liquidity, and greater capital buffers. Additionally, the global authorities are now responding quicker, more forcefully, and with more to come if needed. Current banking sector concerns might be accelerating the ending of this interest rate cycle. It looks that the tightening of the global financial conditions will cool economies and inflation faster, leading to the pivot of the Central Banks policies that the markets are so anxiously expecting.

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu.

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