The Aftermath of Another Banking Mess, This Time in Europe

We're gonna look at some of the etf angles and also just how this changes the whole asset management industry landscape, and it's going to have a couple of different sort of ripple effects that we should look at that will impact the industry and investors. And so joining us Alison Williams, who's a senior analyst at Bloomberg Intelligence where she covers global investment banks and asset managers, as well as Athanasio Sarah Fagus who's an ETF anily with lumber Intelligence, this

time on trains Takeaways from a European banking saga. Alison Athanasios, thanks for joining us on trillions. Yeah, Glad, to be back on. Thanks for having us, Alison. Credit Sweets has been troubled for years. It finally has collapsed into this forced marriage with UBS, creating this megabank, this new megabank. We've also not seen a globally systemic bank fail. Credit Sweez is the first since the financial crisis. So, as a close watcher of this space, just what's the greater

meaning here? Well, I think I guess we can. We can talk about a couple of things, So you're perhaps alluding to the regular Tory landscape. I think it's difficult because this is a situation where market sentiment almost drives reality creates reality. And so the bank, which had raised capital looked very well capitalized, had a lot of liquidity at the end of the quarter, although that had been

slipping away with some of the outflows. And just the fact that liquidity is something that can change quickly and can be impacted by sentiment, and that's a fundamental tenant of the business. So it's difficult to say how regulators can change that except to be vigilant. How much of this and just all you know, all the banks is just a byproduct of the central banks of the world, namely the FED shifting course to fight inflation and raising

interest rates. It seems like there's just been a lot of things caught on the wrong side of that shift. Did Credit Suite not prepare for that properly? Was that a factor in this? The issue with the quantitative easing was there was so much stimulus coming in. It really heightened all the deposit bases. There were no loans to invest in, so these loans were invested in securities. But it really heightened the need to manage your balance sheet.

And because as banks are getting all these access deposits, they have to estimate how much of that is sort of permanent, if you will, how much is more hot money that will flow out once there are other opportunities. And so I think that QE really sowed the seeds, if you will, of you know, placing the banks in that situation that when rates row so rapidly, those who were really focused on managing risk and more conservative were

in a better spot than those who did not. And so the parallel I suppose I would draw with credit suites, which is a little bit of a different situation, but it does come down to managing risk when there is a lot of ebulence in the markets, if you will.

So if we look at twenty twenty and the trading that went on on the significant amount of revenue that was generated across these global banks, and some banks looking to make sure that they keep their risk management in place, whereas others potentially might be wanting to expand that net to make more revenue, and then the cost comes back to bite them. And so I would say in both cases,

the key Israeli risk management. Risk management has to increase and be even more stringent in a period where we're facing unprecedented times, So unprecedented action with que to the extent that we got that qe QT is something we've never experienced. And so I think that when people invest in banks, you look at bank managers. It's similar to a portfolio manager. You have to manage your risks across

a variety of environment. So one interesting thing that UM this revealed about Credit Swiss Athanasios is that they were a big name in exchange traded notes, which is different than an exchange traded fund and lacks a lot of the oversight that ETFs get. So what does this mean for et ns and specifically the ones that Credit Swiss there's always an ETF ETN angle. I guess in this case ETNS. Yeah, so they have this dubious pass of these. Now I'm not saying these products are bad, but they

are used in cases speaking of risk. They want to give you exposure to areas that may be hard to do in an ETF. So they want to use leverage, or they want to give you exposure to some frontier market. So if you remember that XIV product, which was the inverse val Valmageddon, that was a credit Swiss product. Um, you know they had t VX, which is a levered volatility one. That's a credit by the way. So he so you know there's there's an audience for it, right,

people that like Eric leverage. Eric's dad he probably just quick backstory, my my dad. My dad asked me what ETF will go up the most if the market crashes, because he thought Hillary Clinton would win the twenty sixteen election and the stock market would sell off. And I said, well, t VIX. But you cannot hold it, No, you can. And not only did Hillary not win, the market didn't crash, it went up, and he held it. Everything that everything went wrong went wrong with him anyway, by the way,

this is the whole episode. We interviewed our Dads. It was called Our Two Dads. We interviewed Eric's dad, who tends to like risk and my dad less risky. But the real key factor with these is not even the exposure. It's that it's essentially a note right back by the bank, and so if the bank something happens. That's one of those things that you don't really think about, Like, you know, it's like, oh, well, what it's twenty twenty three, wins

a bank and go under. These notes are probably pretty safe, but this was a reminder that, you know what, this is a risk that you need to be aware of. Now, considering that UBS also has etns there, it's probably the best partner. Like if this business is going to live on, because they also offer them here too, I would suspect either, you know, they're going to change the name. You know, it's pretty unprecedented, So I don't know if maybe they want to close on the smaller ones or if they're

gonna redeem them and just keep the UBS business. Eric and I were actually talking about this. I think at first glance, I said etns are done, Like I just think people are over them. When we studied in the past what happened two thousand and eight COVID. People love leverage, they love juice, and these things have endured on even despite some of the you know, some of the hiccups. So maybe not the credits ones as much, but I think etns are still going to be okay after a

lot of this. Yeah, etns, I feel have just found a way to survive, like a cockroach or something, because they were first used to go places that ETFs couldn't, like India. Then when you know that was you can get to India now easily with the stock market, so ETFs. So if you have a choice ETF or ETN, all else equal, people pick the ETF. The ETN at first offer that. Then they offered a tax treatment that was a little more favorable for things that held futures or MLPs.

So that's why you see some of the commodity and vics etns popular. Now it's leverage because a lot of etns have come out that offer three x leverage and you can't do that in ETF anymore. So etns have been creative. I think they should try a bitcoin ETN. I mean it seems like if the SEC's okay with leverage happening at three x and the ETN maybe they'd be okay with a bitcoin. That's just a little sidebar. But I do like you, I think, and in Europe

they've always been pretty big. So I think they're ten billion. That's not big. But it's if they've overcome expectations, I think, and they keep hanging around and finding new ways to live, for sure, Alison. I want to go back to you on a question we talk about. This is a big merger. I was looking at the sort of leaderboard of asset managers and I think, you know, we all look at Blackrock is number one, Vanguard number two, but with this this merger puts them at number three? Or am I

wrong there? Like? How big is this new company going to be? Well, it depends on I guess if you're looking at the wealth or asset or the combined businesses. I think if you if you're focusing solely on wealth, it will be second behind Morgan Stanley and so within that business, ahead of banks such as Bank America or Wells Fargo. If you're looking at just the pure asset management business, it moves them closer to a top ten

perhaps number eleven from being a top twenty. Athanasius I wanted to bring up something that like just lit fire, especially online infilt like, which was these additional tier one bonds that can got wrapped up in this quickly? What are they and where does this net out for investors? Because it turns out that they were wrapped up in

a lot of exchange traded funds. Yeah, so it wasn't just the DTF impact, wasn't just their ETN ETF business in Europe, but also where are their credits responds in ETFs um and so this was particularly a European issue. You know these so these AT one bonds or Coco bonds for sure. So it really worked is why would you buy it in the first place. So they tend to pay a higher a little bit of a higher yield.

They're convertible, so you get some stock participation that the the stock goes up, but the tradeoff is it could be completely wiped out right in an extreme case like we saw. So this AT one was the ticker. It's an invest go ETF. It's probably the biggest one in Europe and it's pretty decent sized, like a billion in assets. It was down like eighteen percent when this news came out

on you know, on Monday. I guess the good news and this is that it was really only in that one product that was one that was hit by far the most um But what I found really interesting is if you started looking at how it was trading a couple of days for it was trading at a pretty big discount even before the news came out over the weekend, So someone with sniffing something out with it. But it's pretty concentrated just to that product. Widentry has won as well,

but that one's pretty small. But then there's credits with stock that's splattered all over all these different ETFs you know, ESG funds, factor funds, etc. But that was probably by far the most extreme case of credits bringing down the

price of an ETF. Another takeaway for me on all this was something that I was enlightened by and now it makes sense, especially in the banks in the US SVB in particular, and I'll throw this to Alison, you know, it seems to me that like there's un potential other issue with banks in general if they aren't going to give enough money for the people who have put their

money with the bank. Like, how much are people getting on deposits, because now you can get four or five percent on a short term treasury ETF and that is pretty juicy or a money market fund, right and the banks, you know, I've looked at some of the rates, they're very low. Are banks going to have to increase their rates on deposits or are they just going to have a lot of people who don't even notice, don't care, Like, is that a risk? Yeah, so's it's a little of both.

And by the way, this was something expected for twenty twenty three, and we had already started to see deposit outflows to higher yielding products, right, so money out from core deposits going into CDs and money market funds. And I think that this over the last couple of weeks may have just accelerated that at for some customers. I would also say that the banks strategies. There were definitely banks who had said again since they didn't they don't have loans to put these a lot of these deposits

in to let some of them run off. But just given sort of the more dear deposits are at the moment, could that change and could banks start to pay up a little bit at the at the end of the day,

we had expected interest margin pressure on banks. So keeping in mind that banks yields, so that's that's their sort of their revenue yield has benefited from the higher rates, and we had expected the cost side of things, which is what they pay for deposits and or other funding, to begin to be more of a headwind for the banks this year because generally as rates go up, the first leg of the increase tends to benefit the banks when you're in a very low interest rate environment such

as we're emerging from. But then eventually banks have to increase those costs, and so we had expect this to be coming. We think it's going to accelerate, and the bottom line is it does put a damper on the bank's net interest margin. And the other factor I think that's coming into play is now that we're seeing the need and value of this excess liquidity, especially in a very uncertain environment that while also further way on the

banks net interest margins. Yeah, it's interesting and Ethanolsa has been tracking this very well. That cash like ETFs, which again yield four or five percent their assets, have just gone up double to over one hundred billion, and I never thought about them competing with the banks, but that's sort of what's happening, right, yeah, you know, and they

make it so easy. And the other thing to remember is you can sell the ETF right away, right So, I mean, you could wait an extra day and get it out of money market fun but it's so easy. Right into the ETF getting attractive yields, you can sell it really quickly, right in your broker account. So yeah, we never really thought about that until we started seeing

it popping up the now, competing with deposits. And when I was researching Vogel for the Bogel book, I wrote there was an interesting part in one of his books about early in vanguards days, they were offering money market funds for low fees, and he basically said the banks started to notice and got scared, and then they started offering their money market funds. So this whole idea of money market funds and ETFs competing with banks is not new, but with ETFs in particular, how easy and liquid and

available they are. I think this is going to be a really interesting thing to watch. And Allison, you know something you and I have talked about and This is a perfect time to ask you about this, is this wave of consolidation. I had talked about the Vanguard effect for years with you, but the thing that offset it was you always had the market going up offsetting the

outflows to cheaper passive products. Now the market isn't complying, and like last year, active mutual funds saw five trillion dollars decrease in assets, most of that just because the market went down. Do you see more of this? Be it maybe banks and you know, having problems with people leaving for money market funds or other reasons, or maybe they were overextended in this market. Then you throw in the passive effect and a market that won't help them

off set those outflows. Could we see just sort of an avalanche of consolidation if the market stays flat or down over the next two or three years. So I think, Eric, the question is is this a choppy market period or are we going into sustained downturn because I think managers are not going to make or not going to want to make decisions about their long term future because of

a tough temporary period in the markets. But to the extent that managers do change their mind and feel that they are entering into a new period, a new paradigm where you're not going to see the market boost that we saw over the last decade or so that really helped the earning their revenue and the earnings of their managers. If managers believe that the longer term future is worse than the past than I think that's what will require

them to reevaluate their options. Yeah. I mean we've seen like even Active is going back to a degree in the etf rapper, but it's got to be below forty basis points, like it's not just active to pass. If it's really what I call the great cost migration, I just think it's been hidden up or covered up by

the bull market. And as if the market doesn't help these companies out, I think a lot of them will try to join forces, get scale so they can lower fees and ultimately compete against the big two black Rock and Vanguard, And that includes banks. Although banks are lucky they have alternative business lines. And as you said, I also think alternatives are a good place because Vanguard black Rock, I mean a Vanguard particular, doesn't really do a lot there.

So I think there'll be they'll have to get clever. They'll have to get cheaper in some places and then go places Vanguard doesn't or where there's it isn't commoditized as much. And I think that's will again will result in more of this consolidation. And of course this is going to be an interesting place to watch to see how UBS just the wealth business, asset management investment bank

hanging more. And of course now we know that there's going to be a new CEO, which is a bit of a back to the future move because he was previously the CEO of UBS, Sergio or Mati Alison Athanasias. Thanks so much for joining us on Trains. Thanks for having me on, Thanks for having me Thanks for listening to Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you like to listen. We'd love to hear

from you. We're on Twitter. I'm at Joel Weppers Show, He's at Eric Balcina's. This episode of Trillions was produced by Magnus Hindrances, but