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The Market At a Glance: Another one bites the dust

The Market At a Glance: Another one bites the dust

5 April 2023

Just think about the first notes of this song, and it will likely stick in your head for the rest of the day…This month’s pick is “Another one bites the dust” by Queen, the iconic rock song released in 1980. The powerful bassline, with its almost millimetric 100 beats per minute tempo, is heady. For the anecdote, that song was used in a study to train professionals to provide the correct number of chest compressions per minute while performing a cardiac massage…Did we need to keep someone alive this month? Not someone but something: the banking system.

Indeed, in March we saw a cohort of banks biting the dust one after the other. It started on the other side of the Atlantic, with Silicon Valley Bank and Signature Bank, which both collapsed. Then it is one of Switzerland’s banking flagship, Credit Suisse, that went down and was ultimately taken over by UBS. Now the focus seems to shift to European and Emerging Markets banks. Although, in each case, the reason for failure was different (for the US banks, it was loss incurred on assets, whereas for Credit Suisse it was poor management), the aggravating factor was the same: depositors rushing out to withdraw their money. There is pretty much nothing a bank can do against a bank run.

These cracks in the banking system got investors worried. And it is no wonder. The banking system ensures the money transmission and the reallocation of financial resources between those who have no immediate economic use for them and those who need them. It is to the economy what the heart is to the human body. Whether we criticize the banking system, want to change its workings or demand alternatives does not change its necessity. And the authorities know this too well. That’s why their response and the means put in place to restore confidence were strong.

So far, the situation seems contained. But it is still too soon to claim victory. The effect of the more restrictive monetary policies central banks have adopted still weighs on the banking system. If we look at the latest actions Central banks took and their recent guidance, they are still committed to applying shock treatment to the economy to cure it of a dangerous virus: inflation. The only thing that they conceded was providing a safety net to banks (credit lines and facilities) in case the treatment induced a heart attack.

And let’s say it straight, other parts of the economy are at risk. We don’t speak enough about the impact of higher rates on the real estate markets of higher rates. And what about the private markets that attracted so much money in recent years? All these pockets of wealth that were overvalued could take a (healthy?) hit.

For now, investors seem to be welcoming the quick response, and markets ended March on a positive note. Despite a sluggish outlook, they are real opportunities for investors. The reason is simple: we are not witnessing an economic pandemic but more of a reallocation of the capital across different asset classes. And this can be healthy sometime.

Demystification room

To understand why banks can fail, let’s have a look at their business model (at least a simplified version). In essence, a bank aims to attract deposits from a diversified base of clients and put that capital at work either by investing it or lending it. If it is able to earn more money on the investment it makes and the loans it extends than what it costs to attract and remunerate deposits, then the bank makes a profit. Operating a bank is about finding that subtle equilibrium between the investment and loan on one side (what we call the assets) and the deposits on the other side (what we call the liabilities).

Why subtle? Because assets are supposed to match liabilities. The reason is simple, if a client decides to withdraw money from a deposit account the bank needs to make sure that the funds are available. Yet, when the bank invests or lends the money it is usually for set periods of time (think about a mortgage for example). So, discrepancies arise when the duration of assets is different from the one of liabilities. In practice, this matching exercise is done by specialized people. Several issues can occur if the process is not handled correctly. First the investments and the loans could perform poorly. If the bank lends the money to the wrong person or invests it in the wrong place. This could result in losses and the bank could find itself unable to reimburse its clients. Second, if all the depositors withdraw the money at the same time, the bank may struggle to generate the necessary liquidity.

And that’s basically what happened to Silicon Valley. A combination of poor investment performance and depositors pulling out their funds at the same time.

Let’s talk wealth

Just before you leave for your Easter vacations, the Wealth Management team would like to draw your attention to the advantages of your VISA debit card.

Haven't you ever stood perplexed in front of the payment terminal when you wanted to pay your bill in a restaurant abroad? "Should I pay in the local currency, or would I rather pay in CHF?"

As a rule, it is better to pay in the local currency, thus you avoid excessive exchange rate fees, because the lack of clarity about the fees can often turn into a nasty surprise. If the exchange rate does not correspond to the daily rate or is excessive, fees have been charged or added without really understanding their origin. Furthermore, sometimes the exchange rate fee can readily exceed 1%.

With Alpian's card, it's easy: you always pay in the local currency and only pay the exchange rate fee of 0.2% (for card payments in EUR, GBP and USD). There are no surprises and no hidden fees. So, payments with your Visa debit card can be made in a relaxed manner and without any surprises. The money will be debited in the respective currency and if necessary, the exchange will be carried out with a fixed and known fee.

With this in mind, the entire Alpian team wishes you a pleasant vacation.

Happy Easter!

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