📑 Research Notes for 2023-03-20
This week, a banking crisis special. We look at Moody's rating cuts to the U.S. Banking sector, Credit Suisse's implosion, an uptick in the Fed's balance sheet, and ongoing bank vulnerabilities.
We conduct extensive investment research and share the most interesting content that we come across every week. Here is a curated list of this week’s top observations.
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Last Week’s Market Performance Heatmap
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Moody's Cuts US Banking System Outlook to Negative After Three Lenders Collapse.
Moody's has cut the outlook for the entire US banking system to negative from stable after three lenders collapsed in the span of a week. The outlook for six regional banks has also been cut. Private equity firms, including Apollo, Ares, KKR, and Blackstone, have shown interest in the loan book of Silicon Valley Bank, which is currently being investigated by regulators for executive stock trades. The new CEO of Silicon Valley Bank has asked depositors to come back to the lender to help rebuild confidence, arguing that with the backstop, it is now the safest place in the US to put money.
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UBS Acquires Credit Suisse to Reinforce Switzerland's Position as a Global Financial Center.
UBS has announced its acquisition of Credit Suisse in a deal that aims to reinforce Switzerland as a leading global financial center. The combined organization will enhance its ability to serve clients and deepen its capabilities. The deal also aims to support the broader Swiss economy and clients during challenging and unpredictable business conditions. The combination of the two banks will further strengthen UBS's position as a leading global wealth manager with more than $5 trillion in total invested assets. UBS intends to downsize Credit Suisse's investment banking business and align it with its conservative risk culture. The combined investment banking businesses will over time account for no more than 25% of the group's risk-weighted assets. Ralph Hammers will be the group CEO of the combined entity, and Axel Weber will continue in his role as chairman.
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Federal Reserve's Balance Sheet Increases by $297 Billion Due to Failed Banks and Bank Term Fund Program.
The Federal Reserve's balance sheet has increased by $297 billion due to failed banks borrowing at the discount window and a new program (the Bank Term Fund Program) launched by the Fed to provide high-quality collateral for banks. It is unclear how many banks are involved in this borrowing, but it could be a sign of stress or banks trying to liquefy themselves. The increase in the balance sheet may not necessarily lead to increased lending in the economy, but rather keep existing lending at prior levels. The progress towards reducing the balance sheet will depend on future developments.
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Jim Grant Warns of Banking System Vulnerabilities and Urges Higher Deposit Rates.
Jim Grant, founder of Grant's Interest Rate Observer, discusses the vulnerabilities of the banking system and the potential impact of rising interest rates. He notes that the Federal Reserve has a history of buckling in the face of difficulty brought on by rising rates, and that the low interest rate environment has led to a phenomenon of zero gravity finance, where imagination displaces analysis. Grant also highlights the large loan portfolio of Silicon Valley Bank, which may have been problematic. He suggests that higher deposit rates could lead to a reimagining of the business model for banks.
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Curated by Joseph Lu, CFA®
Joseph is the founder and managing director of Conscious Capital Advisors, and a CFA® Charterholder.
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