Credit Suisse, Financial Instability, the ECB, and Rate Hikes

we've had this move by the ECB. Bring in Jay Halfield. He's the CEO, founder and portfolio manager at Infrastructure Capital Advisors. And Jay, let's just start with Europe and the ECB. I mean, they're still, like the US Federal Reserve, still very much on this inflation fighting path, raising their benchmark raak by fifty basis points where a lot of people said, maybe pause, maybe just twenty five, but no, thanks Paul

for having me in again. You have to keep in mind the European system is radically different in the US, so they were way behind our FED full percentage point bard our FED. And also their inflation is worse because of their natural gas crisis. It's come down, but it's still a huge problem. And then thirdly, all their banks are essentially money center banks, like our money center banks

are killing it right now. They're getting all these deposits in and keep in mind that that's free money right now. So that's the real problem with our system is that smaller banks are losing deposits, and that's every dollar that goes out costs them roughly five percent, so paying fifty base points or zero if it's a demand deposit, and then you borrow from the Fed at libor plus spread, and so their earnings are getting smashed as we speak.

And that's the core issue, and that's why we've been calling for a rape cut to reduce that the inversion in the Yelk curve. So when you compare that to then what the Federal Reserve is doing the read through, I think one of the takeaways from the ECB is simply that they hiked regardless of the chaos for credit squeezes.

If credit squeeze is a bigger bank and a bigger risk than say SPB as, which I think is the consensus, then does that then insinuate the Federal Reserve is going to stick to twenty five or fifty or whatever the calls were pre SPB. Well, that's certainly possible because they have shown zero ability to process real time data. So and specifically I would point to oil, which is something that we fast coming from Jay Hatfield broadcast. So the

two key indicators of inflation are housing in oil. Oil has come down seventeen percent since the financial crisis started, the bank runs started. And what I don't think the FED appreciates, which is strange because they have research papers that demonstrate this. There's a five percent bleed through of energy prices the core. In fact, if you look in the seventies and draw a line where the two gigantic increases occurred, so two hundred and one fifty core went

up shot up within three or four months. So this is not this research paper just proved it, you know, through through econometric models, but you can see it in the data. So now we have a significant deflation CPI dash R as dropping at a two percent annual rate. And now if you layer in this depreciation in oil, we're headed for a pretty significant deflation. I mean, essentially we're in deflation right now. It's just not going to show up in the indices for a year because they're

lagged by a year. So, you know, do you think this banking situation here in the US, this run on these handful of banks will prompt the FED or should it prompt the Fed the pause here? If not, maybe being absolutely pause that's what they should. Well, they should really cut right, but they are behind every Almost every market participant would agree they're behind the curve. So the best case is probably that they pause. They definitely should

not raise rates. That would be a disaster. And again they're in a much different situation where they are already raised much higher and we have a bigger inversion than they do in Europe. Jay, one of the common piece of commentary that came out of I believe Nomura off the Fed FDIC move this past weekend was that's essentially stimulative and you might then see the Fed end quantity of tightening as a result. Do you view this kind of banking fallout and what has the pre FED has

been prompted to do as stimulative. Well, in the long run, it will be stimulative. And that's one reason that we were saying before this banking crisis that the market would be weak during this period and that we would be in thirty eight hundred to forty two hundred. That's without a banking crisis. So the fact that that range is still working is remarkable. But there's a simple reason for it.

Long term rates are plummeting, and it's not actually true, but everybody trades tech stocks like they have a longer duration. They actually don't, but they still trade it that way. They're all all publicly traded companies roughly have twenty two year durations. But they're also a safe haven. They don't borrow money, they have tremendous cash reserves, and they're very powerful companies, so they're being used as safe haven there

dominate the market. So if you look, there's there's an enormous rotation into large cap tech safety and out of things that are related to financials, including rates, which is irrational because rates are dropping. That's good for them. They're well capitalized, so that's why the market's not crashing, But

underneath it, it really is crashing. Like if you look at the regional banks for obviously, from your perspective, what are we seeing with these regional banks, the svbs, the maybe even the FRC today the signature bank are these one offs or they have a systemic background to them. Do you think, well, I think it's it's not fully systemic because as I mentioned, money center banks and superregionals are going to benefit, and that's the dominant portion of

the banking system. But and this is going to be an issue for politicians hopefully, is that their banks are getting crushed, so the community banks and the regular regional banks. Because if you think about a CFO, so there's sort of an implicit guarantee, but it's kind of like the commercial sort of is not good enough. So if you're CFO and a bank, I'll mention any names certain bank closes, like my CFO call and say hey, should we move

all of our reserves? Because you have to make that call because you're going to be fired if you said, oh, yeah, I know, Silicon Valley Bank happened, but we thought that the FTI C would step in and they decided not

to for political reasons. You're fired. So you have to move your reserves, your checking spread it out, and you're going to move it to super You probably don't want fifty or five hundred accounts, so you're going to move it to money center bank, where then you're not going to get fired, Like if city groups goes bankrupt, you're not gonna get fired. So there's going to be an ongoing run on small banks. It's a huge problem because

they're going to become unprofit. They're going to get downgraded by the rating age whis which that precipitated Silicon Valley's demise, along with the worst equity offering ever executed in human history. I don't I'm certain there's never been an equity offering that resulted in bankruptcy, right, Like, you don't need to do a post meeting to see if that was a good That sounds like a Morgan Stanley bank are pitching

against think any on any particular firms. But that is the worst equity offering in the history of human quick question here, and forgive my ignorance on this. That doesn't necessarily seem like a new concept here naturally that if you want, the bigger banks are going to be safer because essentially they're too big to fail, especially since oh wait, why did a lot of folks invest in these smaller banks? Anyway?

Was the incentive there? Well? I think that there's also too much heat being put on the san Francisco fed because no stress test ever said you're going to lose all of your deposits in twenty four hours. Yeah, there's never been a situation like that. Even like during the financial crisis, we did guarantee the deposits, so we created a system. By accident, we're having this two hundred and fifty limit, which is never hasn't been increased, and there

have been bills to increase. It really created a tinderbox that exploded. It's just like mortgage the mortgage market. There's always something that hasn't been addressed that a two rapid fed tightening cycle will expose. And there's been like ten of them, even in my career. You know, if you think about junk bond crisis, SNL crisis, commercial real estate crisis in the early eighties, there's always oh tech tech crash after that tightening cycle. So this is just the

flaw that should have been fixed. Should have guaranteed all deposits. It won't even cost so much because you get a low you can have a lower rate on more deposits. So you know, would it would hurt the money center banks and it would benefit the regional banks. All right, So what do you what what what? What do you

think folks should be doing in the market today. There's a lot of cross currents here with the FED, um with this banking crisis, if you will, is this just stay on the sidelines here, because I'm looking at the market here and it's kind of hanging in there. Yeah, so that's the rotation going on. So I'm sure we'll have the SNPF, but I'm sure the tech stocks are

starting to rip an offset the bit here. Yeah, right, So I do think that ultimately this is bullish because assuming the FED, but I would wait to have the FED pause, not raise rate, and hopefully good commentary about even being willing to cut, and then that will take the key the key overhang on the market, which I've said before on your shows, is that as the FED because they were just completely out to lunch and thought it was fine to raise rates at this unprecedented level.

So now because the FED regulates banks, they can't ignore it. You know, they're getting the calls from the FDC, they're getting the calls from Congress, and so it's not like CSFB that none of our you know, our politicians, so they have to focus on this and presumably they will consider rate increases there won't be at their normal level of being behind by about twelve months. They can't afford to be behind twelve months here, they have to cut

rates more quicker than that. Well, doesn't that factor in things like any of the retail data, any of the Chinese story, any of the eco stuff that we I feel like have been paying attention to as these tailwinds for inflation in the face of this banking fallout. Does the rest matter? Not really? No, That's why it's important to focus on those two elements that drove inflation. I'm

talking high inflation by way, not one versus two versus three. Yeah, is housing core and energy is only six and keeping my natural gas presents during an eighty percent in the last four months, highly deflationary. But every business the United States uses energy, and so that's the key supply shock. It's not necessarily the ports or chips. I mean, chips was a problem because you can't build cars. But those are the key drivers. And you should look at oil.

It's both an indicator of inflation and it's also an indicator of the potential for a global recession. Jay, we can't let you go without getting kind of your thoughts on energy right here, I see WTI crude oil down again. Today, we're sixty six dollars at barrel. What's kind of next twelve eighteen months? What are you looking for an energy space? Well, before the financial crisis, we were at seventy five to

ninety five on WTI. Because you do have a recovery in China, you do have a pretty robust US economy, which is shocking, but it's because of the pandemic, and you still do have an energy crisis or at least an energy deficit in Europe. So those are all supportive factors. But investors treat oil as a risk asset, and this is a risk off environment. So you're going to crash bullet well below our level, and so it's all bets are off until we get clarity on the FED and

possibly maybe a guarantee of all deposits. I mean, that's going to be hard to get through Congress, but that's what's needed, all right, Jake, great stuff, Really appreciate it as always. Jay Haffield, CEO, founder and portfolio mentor Infrastructure Capital Visors, joining us live here in our Bloomberg Interactive Brokers studio. All right, Let's get back over to Europe a little bit, get a sense of kind of what the feeling is here with the ECB with Credit Swiss.

We could do that with doctor Vanya Straviakva, Professor of economics at the London Business School. Doctor, thanks so much for joining us here. Let's start with the European Central Bank. They came out with a fifty basis point increase given all that's going on over there with the banking situation and namely Credit Swiss. Do you think that was a mistake. Should they have paused or maybe just raised the rate twenty five basis points? What do you think? So? Thank

you so much for having me. It's a pleasure to be here. I think actually they did the right thing. Given the numbers for inflation. They have to establish credibility at this point, and I think the main concern in Europe right now is to get inflation under control. I'm less worried about solvency issues with the banks in Europe at this point, and I think they're probably thinking the

same way. Of course, they will be liquidity issues on the horizon, which is what we're seeing with Credit Swist potentially at a banks, but they're ready to provide a backstop. For example, the Swiss National bandit the same for creditswis is. Of course we can do that for the Eurozone banks. So I think treating it at the moment as a liquidity rud and a solvency crisis is the right approach. Regulation is quite strict, especially for the large banks in Europe,

so credit Swiss is very well regulated. For example, you know the one correcting that was done by Switzerland, and also the UK was ring fencing the retail banking of

the large banks. So both the UK and Switzer one realize after the global financial crisis that these countries do not have the physical capacity to bail out their massive banks, so ring fencing the retail bank, which is essential for the functioning of the economy, essentially is giving them the freedom to not worry too much about having to put

in massive bailouts. And then liquidity can be dealt with in many ways, such as providing loans against the phase value of the collateral, which is what the FEDS started doing, so that they don't have to worry about the decrease in the evaluations of long term government that Professor, I'm curious about the timeline here, it feels like the banking fallout to your point two pause point as well, has kind of thrown the idea of the energy crisis, this

kind of multi year recession we were expecting in the UK out the window. To what extent are those still the factors that the BOE and the ECB have be watching well. So the problems in the UK area are separate because they have to deal with the consequences of Brexit as well mismanagement of the economy for many, many years, sadly, so we are seeing that in the news. The public sector is collapsing in the UK. We are seeing strikes

daily in the news. So those issues are not going away, those structural issues that governments will have to deal with.

But getting inflation under control is absolutely crucial because if we think that high interest rates are a problem for the banking sector, imagine having high interest rates for a very long period of time because we cannot get inflation under control, Potentially the problems will be even more severe, particularly for the mortgages of course, so Europe and the UK the majority of the mortgages of floating rate mortgages, and that's where the real problem will be because a

lot of the borrowers might not be able to soon start repay their mortgages and that will generate a recession down the road. So the longer the high interest rates remain, which they will if we don't get inflation under control, the bigger the cost on anyone that has a mortgage in Europe and the UK, and that's where the real recession is going to come. We're getting a little bit of news. I just want to announce to our international audience here JP Morgan and Morgan Stanley in tax to

bolster First Republic. This of course was the next bank that was expected to kind of get down with signature with Silicon Valley Bank. This is according to reports from the Wall Street Journal. You are seeing farc those shares up hair some of those losses still down twenty six percent, but certainly off the lows of down about thirty percent. Professor Vannia, I want to bring you back in here, not to talk about First Republic, but perhaps a similar

situation with Credit Suis as well. Do the woes and the European baking sector go away if someone takes over parts of Credit Suis well? So the problem with Great Swiss is effectively, they could never gain their footing after the global financial crisis. They couldn't figure out what type of bank they will be in the sense that they were a massive bank. The asset management division and the wealth management divisions who are a big part of the bank, however,

they're not competitive. The fees that they were charging couldn't compete with the black Rocks and the vanguards of the world, and essentially the decreasing fees due to the advancement of ETFs. So I think that's a structural problem. So more generally, people compare this stampede of depositors from banks now to

a classic bank run. I think that's not correct. So the fundamental problem here is not about having deposit insurance that's not credible or insufficient deposits insurance, as governments are clearly willing to bank depositors in full, as the FAT has shown. It's about final investors waking up and realizing their alternatives to bank deposits that can give them both

liquidity and much high return. The banking sector will have to shrink, so Credit Suite has been experiencing that true the ass management division, but this will be true for your standard depositors as well, because many banks will not be able to afford to off a high interest rates on depositors, right, So this is because on their assets then they will not be able to make the interest rates that depositors can make just by purchasing the government data.

This point, I think that's the big problem, and the trend of bank disintermediation had already started, and the rate hikes, together with the SVB collapse and the negative news around credit suites, are just precipitating the adjustment. Yes, there'll be some casualties along the way, but the old bank business model is simply not sustainable in the new environment where even small retail investors can open a bangered account overnight and investing government data bays post to phrase. So now

to be honest, yeah, no, go ahead, professor. What I'm particularly concerned about, and I don't hear being spoken about enough in the news, is essentially there is someone on the other end of these interest rate hedges. So the interest rate indurvatives market is the most liquid market in the world essentially, So presumably a lot of financial institutions and banks are hedge induration risk, But who is providing

this hedge. So we know that this ended a very badly for AG in two thousand and eight because there were the sealers of insurance for the mortgage back securities. If the risk is concentrated and there are a few entities actually providing the interest rate essentially hedge, then I think this will be the casualties this time. We don't know yet where the risk is concentrated, which is a big problem I think regulators. Okay, so professor, just kind of getting back to the ECB here, I mean the risk.

You know, we've heard a lot of folks say, hey, the ECB is making a stake here. They need the pause if they're not necessarily just for the credit Swiss reason, but for some of the reasons you outlined about you know, there's some real stresses out there in the economy, and then the ECB really risk breaking the European economy and pushing into a deep recession. How viable are those risks

do you think? Well, it is true that people arguing that they might be going at a pace that is too fast, I think they are doing the right thing to defend their credibility and whatever the issues there might be with the financial sector which I don't. I do believe they will be issues. As we discussed, they can handle them in different ways, so they have a lot of macropotential tools. It's not just the interest rates that they can employ in order to handle any staguties in

the financial sector. And it's almost like time to give the patient the essentially the medicine it needs, because the longer we postpone normalization going back to normal interest rates, these adjustments has to take place at some point. Okay, all right, you just have to leave it there, doctor doctor Vannier strev Stravia Kava, Professor of Economics of the London School of Business. We really appreciate getting her time.

She's got some cutting edge research on the banking sector and it's just absolutely at the forefront here as the European regulators and the Swiss regulators look at you know, look at credit Swiss and what to do there. All right, let's get back to the story that just broke over the last few minutes of Wall Street Journal reporting JP Morgan, Morgan Stanley and others in talks to aid First Republic. I mean, this is so obvious. I can't imagine these

bankers are actually gonna get paid this investment backers. You're putting this deal to together. I could do this, but let's bring in some of our banking experts, Herman Chang and Arnod cale Kuda. Arnold covers the credit side and Herman kind of more on the equity side. For so we got you covered when it comes to these banks. Herman to me, what do you make of this news? It kind of makes complete sense to me. This isn't

I would think. And either if they're gonna put capital in or outright buy parts are all of that seems like an easy deal to do. Yeah, I think so. We still think our First Republic is a really strong franchise with a lot of wealth and managements assets that are attractive to a potential buyer. And really it's been sucking into the vortex with some of the uncertainty that that proliferated with SVB and Signature. But the capitol infusion news is definitely great news for the bank and management.

So we're looking to hear more on that front. All right, Arnold, come on in here. We just had Alison Williams on in the last hour we're talking about this deal, and she said, look, this isn't an acquisition. This is a lifeline, a lifeline that might not help the stock and bond investors. Well, is it gonna help the bond investors at all? Do they care? Well? I mean in terms of them. You know, we had some big downgrade yesterday from like a you know,

A minus triple plus two you know, high yield. Yeah, big deal. But but they only had an eight hundred million of bonds. This is what this we call fallen angel Yeah, but I mean relatively speaking, it's it's it's pretty small, and they have about like three and a half billion I preferred, So I think the risk is contained for a lot of the investors. But definitely, Um, you know, markets moving on all these defaults happening really

rapidly Credit Swiss. But um, you know, like you guys have been talking about, this is a great franchise, but I think, you know, the headlines can be sleading in the sense of, you know, the crown jewel here is this wealth manager's business and so and from that aspect, you know, even the JP Morgan who's kind of prohibited from buying any deposit franchises, they can kind of look at the wealth franchise and say, hey, you know, Morge Stanley,

that's the crown jewel you you cannot acquire, you know, wealth managing assets so um and and that you know, wealth managing assets you know, um kind of spit off fees and and that kind of stable business is great that anybody would love to have. We did have some or we're seeing some credit downgrades, Arnold. If I'm Moody's or Fitch or whatever, it is one of the two or three metrics I really look at when I think

about moving my rating. Yeah, so I think, you know, looking at kind of what has transpired and the risks of uninsured deposits possibly flowing out, and based on kind of the fears that are out there, right, I think that that's what why they made these moves. I guess premptively for for um, for republic, given kind of all

the headlines out there. Um, you know, I think looking at the stock reactions and people, you know, see the uncertainty of you know, what happened with the uninsured deposits of Silicon Valley Bank on Friday and Monday, right, you know, a lot of the damage may have already been done at this point. And so that's why when you see these news things about like oh, we tapped extra liquidity from the Fed FDIC O JP Morgan's extending US credit line.

It's like, oh, oh my god. You know it's it's that whole thing of like, why are you saying that if there isn't a problem? Right? So well, Hermann hop back on in here, because we're talking about First Republic obviously in this capital infusion, but another that is trading the stock in terms of his trading tick by tick is Western Alliance w AL Folks is the ticker there. This is the company that recently got a five point

three percent stake from Ken Griffin of Citadel. Now we know which in its own ways its own capital infusion. What kind of numbers are we looking at here? I mean, Alison was very careful about saying, look, First Republic is not being acquired yet, right, will it be? Are we looking for a potential stake still or is this kind of lifeline going to be enough? Yeah, that's that's a

millionailar question at this point. Does the stake by potentially JP Morgan and Morgan Stanley stabilize the market fears and stabilize the deposit outflow If those two things happen, then you know that that would be great news in terms

of Western Alliance. It's another bank that operates in the western part of the United States, and they have branches in California and Arizona and Nevada and does have some exposure to the venture and start up community, but it's very small relative to what SBB did, which is the entirety of their business. So they are unfortunately lumped into the same situation and not having some of the duration risk that the SVB had, So there's unfortunately they get

thrown into the mix. All right, I'm gonna throw this out for either of you, two or both of you, whatever you want to do. I could care less all I want to because I'm trying to figure out, and I think a lot of investors are trying to figure out, how systemic is this bank issue. We're all still scarred from two thousand and eight when everybody got pulled into it. When the FED races rates by like five hundred bases points within a year, what does that mean for a bank? Sure?

What's it mean for a bank is that some things get caught off sides. They weren't expecting such a rapid rising rates and they get caught off side. Doesn't mean you get caught off side. You purchase securities or you do loan at a very low rate environment and aggressively. And when rates rise, the value of those assets decline. And when there's a loss in confidence in a bank, that can just spur a lot of uncertainty the market, you know, the share price come declines. And that's really

essentially what happened with SVB. All right, we'll hop back on in here, Arnold, and and talk to us a little bit about where we go from here. I mean you already mentioned that we have seen this wave of downgrades. Uh, these wave of kind of distress for some of these banks. Are you seeing the show up and say the hedges

or the insurance the CDSS against some of these banks. Well, I mean I think, um, we've seen spreads widen first on this SVP and then Kretswiss you know a lot lot more and yeah, and you know, one metric we look at kind of in the corporate bond spaces, you know, the financials, how do they trade versus the overall overate bond index? And um, you know they had wind out in twenty twenty two until October and then we rally back almost a flat and then obviously not now they're

training about twenty five wider again. But I think it's going to be tough for the financials to kind of kind of regain that, you know, unless the markets really calm down. I think it's gonna be tough, you know, for the financials to kind of tighten back up again compared to the role index, given kind of the default risk, which is real. Yeah, so we were talking about systemic risk broadly, but let's talk about the bond space specifically in terms of contagion, in terms of trading and sympathy.

Are you seeing the credit Swiss situation bleed into kind of the regional bank situation because in my mind they're two separate issues. Yeah, no, I agree with that. Um So, you know, with the regional banks stuff, I think, you know, for the select regional banks that are having issues, um, you know, it was like, okay, maybe the bigger US banks, the biggest US banks like the JPMS ba AS, that's

kind of like a safe heaven. But then when you deal with Credit Swiss and kind of the interconnectedness to the counterparties and all this and that then it's like okay, well, well then the bigger banks are kind of more exposed to that, although we haven't really seen it in the pricing yet, you know, something were to happen, I think you know, that's where you're going to be like, hmm, you know, who has kind of the most ties to kind of a you know, global systemically for an entity,

It might be the trading desks and they might be coutaparts here and there, although at least Credit Swiss, you know, they had been kind of shrinking their trading portago platform, right, so, um,

maybe the risks are more contain there. But but if anything, you know, you got to look at start looking at the biggest banks again in terms of kind of the systemic contagion risks from the Credit Swiss and on the regional side, the contagion and the systemic risk and the interconnectitivity really isn't there, So so that risk should be

off the table on the regional bank side. So herman on the regional bank side, if I were an annals and I know about you know, fifteen minutes of experience in this um, what percentage of a bank's deposits are enshort on average? Yeah, it really runs the gamut um. So for I could just screen on that, right, Yeah, you can. You can screen on that. You have to dig deep into the regular portory filings, but you could theoretically do it. Because I know you're a smart person.

I would say that it runs a gamut SBB was about five percent, signature was about ten percent. You want as an investor, I want as higher percentage as positive, correct, because I would both because they had these big deposits, well above to a big commercial deposits. Okay, and you want fifteen minutes, I got ten together. It's twenty five exactly. So you want them high. Your former employer, M ANDT Bank, what was their insured deposit? It's more about the fifty

percent or around that level. Yep. See, that's what I'm looking forward to see. Why can't I just screen on that. I'm sure I can on the Bloomberg terminal and I buy the good ones and I sell the bad ones. That sounds like a very good idea. But I presume that if with Silicon Valley Bank, I'm willing to take that deposit risk. I just called it deposit risk. I

don't know what you guys call it. Why do I take that deposit risk because you were not expecting a deposit flight, because you know, a week ago the strength of the institution was the venture capital relationships and the startup relationships. That became a weakness when there was a loss in confidence. Boy, I could now be a bank's analyst.

I think I've learned so much. Paul Sweeney here with Pretty Gupta Matt Miller out Today we've been focusing on testimony from Secretary General Secretary of the Treasury Jennet Yellen.

She is testifying in front of Congress. We started off the day with some news out of the European Central Bank raising the benchmark rate by fifty basis points, and there were calls for maybe a pause, maybe just a twenty five twenty five basis point increase, if for no other reason than to just cool the market's given some of the turmoil we've seen in there with the banking sector. Let's go back to Europe and get a sense of kind of how the market's dealing with it today. Marianne Squadell,

founder of Bougeville Consulting, joins us. Marianne, I'd love to get your thoughts, so kind of what you believe or kind of your takeaways from Steam regards fifty basis point move at the ECB. Yes, well, you know, I've been reading.

I used to work as a regulator a very long time ago, and what I'm hearing from my previous colleagues is that the regulators are quite confident that the banking sector is a little bit stronger in Europe because I didn't realize the rules, you know, on a mid sized landers. So in the stress test, they're confident that they're strong enough. And so I think there's there's this sense in Europe at the moment. I think that's what that's might take

on it. Obviously nobody knows what's going to happen, and it's obviously a question of confidence at this stage. So you know, the backdrop of some concerns, obviously a major concerns a credit Swiss. How do you think that played into the ECB's decision here, because there are a lot of people saying, boy, if you take a look at some of the potential wider risk from continued challenges a credit Swiss, that in and of itself might suggest that

they pause. So I don't know, but you know, in the UK we still have this memory of like there was even before the financial the financial crisis in two thousand and seven, there was a run on a bank which I'm don't know in the US if you heard much about it. It was Northern Rocket was a big lander and we saw in the streets of London people lining up to get their money back, and that was

something major. So the governments in the UK, in the European Union, it's maybe a bit different, but in the UK, which at the time was part of the European Union obviously, So in the UK, you know, the government worked throughout the weekend. There's HSBC that bought SVB for one pound and I have a friend who invest in a startup.

The startup decided to stay a client of SVB, and they feel from a client's perspective, but deposit takers perspective, they are feeling fairly reassured and the sentiment at the moment is not as panicky as as you know. Maybe, so that may have played a part obviously in the decision of the Central Bank. So, Marian, you know, I'm a former employee of Credit Swiss, so I'm paying very

close attention there. Um yeah, and I do, and I a lot of things that I think a lot of us learned during the financial crisis is, particularly for these investment banks, is counterparty risk and that concept that at boy, if the market doesn't have confidence in your institution, it is game over. I don't care who you are and what the name is on the door. How do you assess that risk for credit Swiss at this point? Hmm, that's a very good question. That's it's really too early

to tell. I think, Um, it's it's a very good question. Um, we don't know. That's that's SIANSO. Um, right, we don't know. All right. So what's the next step here for the central bank? Do you believe? Um? In Frankfurt? Um? Well, I don't know what they're going to decide, of course, but at the moment everybody is kind of weighing up the poison cons you know of what's going to happen. But as you said, it's a question of confidence. If you know depositors stay put, you know, there's the risk

the inflation becomes obviously more of a priority. Otherwise it would be you know, the confidence of deposit takers. That is a priority. All right, Marian, thank you so much. We appreciate getting some of your time. Marian Scordell, founder of Bougeville Consulting. We started out the day we want to get back to We start off the day with the ECB really focusing on Christine Lagarde. The ECB, they stayed true to what they were saying, fifty basis point move.

So whenever we get news out of the Bank of England or the ECB, there are two people we have to talk to. Marcus Ashworth Boom we take that off this morning, Bloomberg Surveillance and John Authors. These are two cranky Brits who if they've got something to say, they don't mind saying it. Folks, John, what do you make of Christine Leguard that European Central banks fifty basis points move. Don't we have the risk of a recession. Don't we

have a big bank that's in trouble? What's going on? Well, I'm not feeling that cranky just at this moment, just to get that on the record, and it's also rather wonderful just watching Bloomberg Technology on Bloomberg TV at the moment where for some reason we have two cranky Brits introducing the America curmudgeonly. Yeah, I like that. I like that. I might go with being a curmudgeon, if not a crank.

In terms of what the CB has done, they have you know, they have a dilemma and they've decided to go all out on the belief a inflation really matters and it isn't beaten yet and B and this is the critical one that you can separate the functions of fighting inflation and maintaining financial stability. Certainly it ought to be the case if credit suisses issue, and of the different banks that have fallen in this country is if that issue is merely liquidity as opposed to solvency, then

they should be safe. They should be within their rights to carry on tightening rates. That said, the fact I personally gasped when the news came this morning, and I think plenty of other people have done as well, it is pretty seriously courageous that they've pressed ahead with this. They are very strongly signaling that they don't think the banking sector is in that much trouble, and courageous is not always something you want to be as a central banker.

But what measure do they come up with that conclusion that the banking sector is not in that much of a crisis. Well, if you look at priced book multiple, suggected in my column last night for the year of the Eurozone banks, Yeah, they're trading below book but they've been trading below book value for fifteen years and there's really nothing particularly crisis written or scary about the trading in those in fact, in the actual share price given the greatest risk here is buying the stock in one

of these banks rather than taking out a deposit. Plainly, shareholders are much greater risk of being wiped out than depositors. Oddly enough, we are still not showing as much stress as either eight or eleven twelve, which for the European banks was actually in many ways a bigger deal than O eight was. And I think in a way we all became experts on the TED spread. Can you give us the dummies explanation spread the TED spreads? It's the TED spreads is the comparison between the short term rates

at which which banks lend to each other. Still, although libel has had an interesting history in the years since the global financial crisis, it's what we think of as libel. It's the rate at which they lent to each other compared to the rate you can get on T bills. So generally those two numbers are very close to each other, and the banks are very slightly higher. When the spread rises, it indicates that banks really have a problem trusting each other.

The TED spread at the moment is still unremarkable. Banks don't have any great degree of distrust with each other. There is a danger in taking O eight, which most of us who lived through eight find it difficult not to take O eight as a base of comparison. What happened to the TED spread, what happened to banks trust in each other in a eight was extreme. Because we've gone through all this, just nobody knew who was sitting

on the bad loans. They didn't even know whether they themselves were sitting on the bad loans, and trust was completely destroyed. There is nothing like O eight on the picture. The possibility that this is a liquidity problem that will require banks to put up with far less in the way of profits and will be part of a slowdown

in the economy, that's a really serious issue. There really shouldn't be any risk of a true repetition of two thousand and eight, and again I'm startled that they had the courage to go through with this, But perhaps the ECB view is by being deviated from the path Fate's clearly spelt out before, they would have increased the risks that people would say, Okay, BCB is running scared. They

must know something. We should run for the hills. John, you mentioned your reference to your opinion piece, and folks, you can find that at Bloomberg dot com slash opinion or OPI n go on the terminal. John's pieces entitled move along, there's no crisis to see here? Um headline exactly yes. Um. Here in the United States, I would say the consensus is soft landing, no landing, something on those lines. Probably not a hard landing. Isn't the same in Europe? Would you say? Or it seems a little

bit more precarious there. I'm not sure that consensus this is quite so clearly that we get a soft landing here as it was a couple of weeks ago, And if it is, I don't quite know why people are expecting rates to come down quite as aggressively as they do in Europe. The situation is very much murkier because of this big extra factor of the energy crisis, So at one point that was a big reason to expect a really serious slowdown in economic activity this year, a

perfectly reasonable one. And because the weather in Europe turns out to have been I gather to standard deviations better than you would normally expect a really mild winter, that's had much less of a drastic impact than would have been expected. So the risk of a hard landing has moved out of the well, sorry it hasn't gone away, but it is reduced very significantly, and that in turn has increased the pressure on the ECB to be somewhat more hawkish than they were previously setting out to be.

But that, certainly, that energy factor, plus the way that the the the European financial system works through banks more than it does through markets, and its banks have never really totally recovered from what happened to it at the turn of the last decade, that that does make the situation very different. Usually it's the feather goes first, right, the timing of the calendar that has the ECB going first. Does J Powell take any queue from Christine Legard this

time around? It makes it harder for him to pause altogether, I think, But we don't know what's going to happen in the next I've still got We've still got four and a half days before before he he. The FOMC has to make its decision absent a significant new banking issue flaring up somewhere, and I have no opinion on right the probability of that is, but absent that, I think twenty five basis points hike next week is very likely that the we don't need to get into all

of it. The data does not suggest that that inflation on its own is still too high for them to stop hiking. Then the folks that are pricing in cuts for next year, for this year, I'm sorry, the back half of this year again, that's what we see on the bloomer term of the futures market very much. So, yeah,

I mean, what do you make of that? And for thirty seconds, like I said, that's why I'm nervous about you're saying, soft landing is still the is still the dominant scenario if we need to cut rates the way the monket currently implies before the end of the year, that's in plies a landing with somewhat op and obviously there's a risk of that and a banking crisis would deliver that. It's still not clear to me that we have as serious a banking crisis as something all right,

very very good as always. We got Marcus Ashworth, we got John Authors, We've got the euro and UK cover. That's how I like to think about it. John Authors, thanks so much for joining us here from Bloomberg Opinion. He works on the Markets team, does all that kind of great stuff. He joins us here on our Bloomberg Interactive Broker Studio, so he gets that gold star for showing up as opposed to phoning it in. Thanks for

listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews an Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three. On ball Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catches worldwide at Bloomberg Radient