First Republic Rescue and Continuing Credit Suisse Fallout

Poland sending fighter jets to its neighbor Ukraine. I'm Dan Schwartzman. I'll have news coming up that's all straight ahead on Bloomberg Daybreak Asia, The business news you need to start your day in just one fifteen minute podcast available on Apples, Spotify, the Bloomberg Business app and everywhere you get your podcasts. Good morning, I'm Brian Curtis and I'm Doug Krisner. Here

are the stories we're following today. Top stories here the biggest banks agreeing to deposit sixty billion dollars with First

Republic Bank. It's an effort supported by the US government to help stabilize the California lender after the collapse of three regional banks, JP Morgan Chase, Bank of America's City Group and Wills Fargo contributing deposits of five billion dollars each, Goldman, Saxon, Morgan Stanley kicking in two and a half billion, and then there were a number of other banks providing one billion.

We heard earlier from Bloomberg's sermon, chan, I think what the government, in conjunction with the private sector banks are doing is drawing a line in the sand, saying that SVB happened, signature happened. We're not going to let First

Republic become a failed bank. Shares of First Republic, has mentioned swung pretty wildly today, plunging about thirty six percent early in the day, then surging as much as twenty eight percent as details of this plan were first reported, and as mentioned during the regular session when it was all said and done, First Republic shares up ten percent, and just now checking again twenty three point eight percent

in late trading. Rish are dug And then after the ballot we learned how much should banks have been borrowing from two FED backstop facilities during the most recent week. The number close to one hundred sixty five billion dollars that story from Bloomberg's and Kate's. Data published by the FED show almost one hundred and fifty three billion dollars in borrowing from the Discount Window, the traditional liquidity backstop for banks, and the week ending March fifteenth. That is

a record high. The prior all time high was reached during the two thousand and eight financial crisis. The numbers also showed just under twelve billion dollars in borrowing from the new emergency backstop known as the Bank Term Funding Program, which launched Sunday. Taken together, the amount of credit extended

shows a banking system that are still fragile. After the collapse of two financial institutions in Washington and Kate's Bloomberg Daybreak, Asia, Treasury Secretary Janet Yellen tried to reassure US lawmakers about the collapse of SVB and Signature Bank. Here she is testifying before the Senate Banking Committee. I can reassure the members of the committee that our banking system is sound and that Americans can feel confident that their deposits will

be there when they need them. This week's actions demonstrate our resolute commitment to ensure that our financial system remains strong and the depositors savings remained safe. Yellen said that regulators must re examine banking rules and supervision and make sure that they're appropriate. He added that liquidity in this instance had played a very important role in the recent

bank failures. Well, the European Central Bank wind ahead today with its planned half point increase in its key rate, the rate now lifted to three percent, even though we've been talking about the turbulence and financial markets as it results from some of the liquidity problems in the global banking system. Now. During a press conference, President Christina Legarde said the ECB has a lot of confidence in European banks.

In Europe, we have strong supervision, we have strong capital, and we have solid liquidity positions and as the vice president said, exposures are not concentrated and based on the work that has been conducted by the SSM, we don't have similar occurrence as the one that occurred in California for instance. Le guard went on to say that it wasn't necessary to give guidance on what the ECB will do at its next meeting. She essentially declined that question.

She went on to say the elevated level of uncertainty does reinforce the importance of being data dependent, and she added that ECB officials won't wane on their commitment to fight inflation. We're hearing Credit Suite and UBS are opposed to any kind of forced combination. This comes even as a scenario planning for our government orchestrated tie up continues. We get more from Bloomberg Sonali Basak, BBS Credit Sue.

This was the merger of dreams for a very long time, but the moment in time we find ourselves in now. If UBS were to buy a Credit Squees, they would also take on all the risk tied to Credit Swees and would also probably also needs some support from the Swiss National Bank. We hear that UBS would prefer to focus on its own wealth centric standalone strategy and Credit Sweez is seeking some time here to sort through its turnaround after winning a liquidity backstop from the Swiss National Bank.

The Swiss government and the lenders are running through a whole range of scenarios and it remains to be seen which additional steps will be taken. All right, doug, Let's take a closer look here at First Republic share. So a lot of listeners might be wondering, well, what does First Republic have to pay to get that kind of injection. I mean, it's just a deposit really of thirty billion dollars,

and it's kind of buried in our story. But First Republic actually will just be paying market rates on that thirty billion. And if you think about it, all of Silicon Valley banks depositors were confirmed as whole by the federal authorities, and yet nobody wants to buy the bank, So it can kind of understand this is just deposits at First Republic. Doesn't really change the cash posi position of the company all that much, and so you might wonder if that's why the shares are down so much

in after hours. And on top of that, initial commitments from these eleven banks that are supplying the deposit injection that initially will only extend for around one hundred and twenty days. It could go beyond that, but at this point, I think the focus is on just the next four months or so. Now, maybe the market is concerned about the longer term condition of this bank. We'll have to

wait and see on that. Yeah, yeah, I mean I think what's interesting is that First Republic since March ninth, so basically just a little over a week, was borrowing money from the Federal Home Loan Bank. It borrowed ten billion dollars at a rate of five point zero nine percent, So that's what it was costing it to get money into the system. Now you get thirty billion. And I went on their website to see what they're paying for deposits,

and of course it's not posted. And even if you try to get the one hundred twenty days in a seed, you don't see the numbers, but you know it's going to be way less than that. So it's good for First Republic. They're getting cheaper cash, as it were. But the other thing to kind of put your finger on is this idea that consumer sentiment, even business sentiment, may shift in such a way where people feel more confident in being exposed to or deposited having their deposits with

a larger lender rather than a small, boutique regional bank. Yeah, that is a very good point, because this is really about depositors and stomping runs on the banks. It's not for saving the equity investors in these banks. You know that is a sort of distant down the road thing, but keeping the system working and stopping the bank runs and that's what these deposits will help dot at first Republic.

But it's a story. As I mentioned, you know, looking at the action after hours shows you that these trends don't last very long, and we don't know exactly where we'll be. The FED has a lot to think about over the next many days before next week's meeting. All right, time for Global News. An important summit occurs in Tokyo. Dan Schwartzwen with details and the news from the New York Newsroom. Dan, Yeah, definitely, Brian who was a thong

of relations in Tokyo between two Asian powers. South Korean President yunsuk yul meeting with Japanese Prime Minister of Fumio Kishida as the two countries held their first formal summit since two and eleven. The two leaders agreed to restart a security dialogue as well as advancing military intelligence sharing. Japan also announcing it would be lifting export controls on three key materials used by Korean chipmakers. The US has wanted the two countries to begin warming relations to counter

the threat of North Korea and China. Poland sending fighter jets to Ukraine. Polish President Andre Duda says his country is sending four Soviet era MiG twenty nine to Ukraine in the next few days. Poland has already begun sending Leopard two tanks to its eastern neighbors, with a total of fourteen expected across the border. US Secretary of State Anthony Blincoln, commenting on the delivery of the jets, different countries are doing different things in response to what they

have and what the perceived needs are. Lincoln was speaking from the West African nation of Niger. China and Ukraine's foreign ministers holding rare talks ahead of a possible conversation between the country's two presidents, King Gang telling Demitro Kuleba that China is committed to promoting peace while also wanting to advance negotiations. Kuleba said he discussed with Gouging the

quote significance of the principle of territorial integrity. Ukrainian President Vladimir z Lenski and his counterpart Shijinping could talk for the first time as early as next week, after she is expected to be visiting Moscow. Russia's looking to recover the wreckage of the US drone that went down in the Black Sea. The US says that anything sensitive on the craft would have either sank into the ocean or

was destroyed, as the drone operators took mitigating measures. Video of the intercept by two Russian SU twenty seven fighter jets showed the plane spraying jet fuel on the drone before one of the planes appears to clip the propeller of the drone. Russia claims that drone went down due to quote abrupt maneuvering. Pentagon spokesman Brigadier General Pat Rider on why Russia can't get much info from the wreckage.

I'm not going to go into details, but that we took steps to protect information aboard that aircraft and to the fact that it crashed and extremely deep water. General Rider was speaking to reporters at the Pentagon. California's crippling drought that has lasted three years is close to ending, as strong storms over the past few months have left

behind a record snowpack in the Sierra Nevadas. California relies mainly on snow and rain for the bulk of its water to feed its large agricultural industry, Global news twenty four hours a day, powered by more than twenty seven hundred journalists and analysts in over one hundred and twenty countries. Dan Schwartzman, and this is Bloomberg. This is Bloomberg Daybreak Asia. I'm Brian Curtis in Hong Kong alongside Rashad Salama. So let's welcome to the airwaves. Ann Barry, founder and managing

partner at Threadneedle. And we appear to be at the ad or near the end of the rate hiking cycle, regardless of what the FED does next week. I mean, we're getting somewhere close. So I get the enthusiasm today, a little bit of a relief rally with the deposit story at First Republic. But doesn't the downside risk outweigh the upside possibilities at the moment? Sell come back later, Brian, Wow, did you meet my mind and sort of take my talking point and say it right there? Selling? Come back later?

I think, Brian, the question around the FED is the really critical one. Particularly enlightened what happened with the ECB making the choice to hike rates if the FED doesn't hike next week, Given that the inflation data here in the US was pretty strong. Is that the FED going to be perceived to be as having a vote of no confidence in the US banking system? Does it almost need to hike at this point because if it doesn't, people are saying it sends the wrong signal. I think

it's tricky. I think we are going to have to anticipate a great hike coming through no matter what's going on right now with FARB. I mean that is I think you hit the nail on the head that they are caught within the rock and a hard play, so, yeah, they really are. There's no win. Some humility could be in order. I mean, nobody saw this coming, really. I mean there may have been a few people out there shorting these regional banks so because they saw the mismatch.

But for the market's point of view, I mean, and we didn't really see this coming, and the FED wasn't really talking about this and warning about it. Wouldn't it just be a humble move to say, yeah, I mean, we're confident in the banking system, but we've seen some ructions here. We've had three bank feel here. Is it's prudent to pause here and assess and we'll see what happens next. I think that would be a real admission of failure that the SAID can't really afford to do

from a credibility perspective right now, Brian. When you think about the Fed's focus, it has been consistent that it has to be uniformly focus on making sure that inflation comes down, maximum possible employment at the lowest possible inflation rate.

If they do not believe, if the street doesn't believe, if the market doesn't believe that there's a fundamental risk to unemployment right now and inflation continues to be high, I don't think the FED has any choice, particularly particularly since there have been a number of statements coming out now from the White House and from Secretary Treasury Secretary Yellen saying that there is confidence in the banking system. If the FED doesn't move on that basis, it's contradicting

central government. All right, And but let's have a look at all this, you know, because at the same time, we you know, as we be then we went into this like a bit of a lull. But you know, you always felt as the investors were waiting for the next shoe to drop, and then we've got credit Suiee. Was that the shoe which dropped, because really, ultimately that's been in the making for a while. That problem, Yeah,

I agree with I think I agree with that. The credit Swie issue has been making in the making for a long time, and you can see it in its share price, which has been consistently declining since posts the Great Financial Crisis. SPB is a different thing, and here's where I think the shoe's about to drop next. And

it's not about systemic bank issues. It's about the fact that endowments and pension funds haven't yet seen the full hit to their positions in venture capital and in private capital markets because those funds haven't yet sufficiently marked their portfolios down. But now with SDB, they're going to have to. What are we talking about in terms of exposure here, because these are meant to be retirement funds and meant to be quite conservative. Yeah, I mean it's been significant.

If you take a look at a lot of the endowments and pension funds, they have been increasing their exposure personally to later stage private equity, but also to venture capital over time. And if you see what happened Richard, you saw that a lot of these funds. Tiger marked its venture portfolio down thirty three twenty twenty two. Soft Bank has marked their portfolios down for twenty percent for

twenty twenty two. But now we're in twenty twenty three, and what happens if someone tries to turn up to buy Silicon Valley Banks ten billion dollars portfolio for even bigger discounts, then what are the endowments and pension funds going to have to They're can have to the marks down further. So I'm kind of surprised because, you know, it seem like from your words to the fed's ears, I mean, are they not listening? Are they not seeing that?

But you're saying that you still think that they have to raise twenty five basis points in the end, Does it really matter at all whether it's twenty five or pause. The commentary is going to have to be something about we're, you know, we're assessing where we're at, and we're paying some respect to the long and variable lag angle. I think certainly the voiceover so when we see Jay Powell come out and do his press conference and we read through the minutes, I think we definitely need to see

that language. Brian when it comes to the actual execution of a hike, will they pause or not. I'm at least hopeful that they go up and they pursue that twenty five basis points because inflation is not under control yet and there's no sign really that there's going to be that control that two percent target going to be hit anytime in the next twelve months right now, Well chapping, you know, so we're talking about financials, but about the you know, this is one thing which is not as

regulated and a bit definitely more opaque. How does it all creep into the non banking side of the economy and then the non formalized banking sector. Well, parts of the non formalized banking sector that has been growing over

time is the private credit area. So if you take a look, for example, at these big asset managers which have traditionally been in private equity, or they've had some public market arms such as Blackstone, or if you take a look at Apollo, which is a name that's been going around a lot, it's potential bid of for SVB lately.

Traditionally they've made their name in private equity, but private credit is really where a lot of the action has tended to happen, and what we're seeing now with the banks where confidence is low, I think we're going to see the pullback in commercial lending by these big banks as they try and tighten their underwriting standards, and that's where we could see these non traditional capital providers step in. Yeah,

let's take a closer look at First Republic. It's only one bank, but you've written about it in your notes, so fair game. We see the star that starts down pretty sharp and after hours. Now I know that liquidity is a bit thin in late trading there, but still, I mean, you have to pay respect that twenty percent down after this thirty billion injection. It's only a deposit injection. And the analogy that I made earlier, I think is real that Silicon Value bank, nobody's buying it, even though

all the deposits were guaranteed. And here you have First Reprobably you get thirty billion, but you know, there's who knows whether they get anymore, and people sell down the start. Well, I think the question is whether there's going to be a guarantee extended beyond the two hundred and fifty thousand limits for First Republic in the way that there has been for signature and for SPB. I mean, I think, Brian, what's interesting the eleven banks coming in with a thirty

billion dollars of deposits. In my mind, is the banking system self medicating in the hope that this means that regulators won't have to come and cure it for them. But you raised the point earlier. It's only one hundred and twenty day solution, and so I think there's twenty percent down in the after hours trading is a reflection of the fact the market saying, look, we really like

the sign of infidence. We like the fact the banking system is rallying together and trying to be collegial about this, but it doesn't solve the longer term issue. We need evidence from First Republic that there's no bigger fundamental issue and that confidence can be restored. Okay, twenty seconds or so. Where would you put new money at the moment or would you hold it in cash? I'm holding it in cash. I have you for a while, Brian. It's particularly creative.

We're imaginative, but until this shakes out, I really fail to see something that's yielding a better return than holding short duration treasuries to maturity and thank you very much for joining us. We appreciate it. And Barry, founder and managing partner at Threadneedle. This is Bloomberg. This is Bloomberg Daybreak Asia. Your morning brief on this story is making news from Hong Kong to Singapore and Wall Street. Look for us on your podcast feed every day, on Apple, Spotify,

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