While the regional banking crisis in the US was unrelated to the travails of Swiss bank Credit Suisse (CS), it laid the foundations for an intriguing month of March for financial markets.
Global equities as measured by the MSCI World rose 3.2% while global bonds as measured by the Bloomberg US Aggregate index also rose 2.5%.
During March the health of the global banking sector was brought into sharp focus. The collapse of Silicon Valley Bank (SVB), a US bank with strong ties to the US tech industry and two other regional banks Signature & First Republic was unexpected. It appears that while the larger systematically important banking institutions, since the global financial crisis are well capitalised with strong risk management, the regional banks’ balance sheets were not under the same scrutiny.
This was further exacerbated, by the run-on bank deposits at Swiss bank Credit Suisse leading to its takeover by Union Bank of Switzerland (UBS). Astonishingly, the Swiss central bank forced CS to write down to zero value a type of debt called Additional Tier 1 (AT1) which shocked the market of this asset class. AT1s are a type of convertible debt which can be written down to provide the issuing bank emergency liquidity. It was surprising because while AT1 holders lost 100% of their position, equity holders – although paltry – were to receive some compensation. (Usually, equity holders bear the brunt of liquidity calls first then bond holders.) In CS’s case the ranking of equity lower than debt was turned on its head, meaning the credibility of the asset class was brought into question!
Following this, on Monday March 20th markets in the AT1 asset class opened significantly down leading to worldwide reassurances from central banks. Investors not immediately, but eventually received the news positively.
