Market update
European markets are broadly lower today with shares in France off the most. The CAC 40 is down 1.16% while Germany’s DAX is off 1.11% and London’s FTSE 100 is lower by 0.76%.
U.S. stocks were lower today, with the previous day’s rally fading as concerns over the health of the banking sector remain in focus. Dow Jones Industrial Average futures lost 189 points, or 0.6%. S&P 500 futures fell 0.4%, and Nasdaq 100 futures were flat.
Asian markets finished broadly higher today with shares in Hong Kong leading the region. The Hang Seng is up 1.79% while Japan’s Nikkei 225 is up 1.20% and China’s Shanghai Composite is up 0.73%.
Silicon Valley Bank default
The closure and wind-down of Silicon Valley Bank (SVB) has led to some considerable stress in global equity markets this week, particularly among shares of regional banks, as well as fear of contagion.
There are unique elements to SVB that contributed to its demise, including its client base and risk controls.
Whilst we are, not fully “out of the woods” yet, we view the regulatory response as appropriate and likely adequate, which should head off contagion fears. We hope the following helps to explain the details of the bank’s demise.
What Happened?
Silicon Valley Bank (SVB), the 16th largest bank in the U.S. in terms of assets, was the second largest bank failure in U.S. history and had international operations that were also impacted.
As well, another (slightly) smaller bank, Signature Bank folded in similar fashion. In the case of both banks, authorities have taken over these troubled financial institutions, with the intention to create the best outcome for bank depositors, including the sale of the U.K. branch to HSBC for £1.
The SVB/Signature story has a lot of moving parts, but ultimately boils down to an old-fashioned bank run. A flood of withdrawals from depositors destroyed these banks.
How could this happen?
Ultimately this type of situation, while complex-sounding, is fairly simple: there were not enough cash and liquid assets available that could be sold to fund deposit outflows, without wiping out their equity capital base. That’s in part because banks are not forced to carry enough cash to fund 100% of their deposits.
According to regulations, they’re allowed to invest multiple dollars ($10, in round numbers) for every dollar of deposits.
These investments, which could be in the form of loans to customers or invested in marketable securities such as bonds, are generally longer-term in nature, and are not always able to be sold or otherwise harvested at a profit.
Comparisons have been made to gym memberships; if every gym member showed up at the same time, not everybody can get a workout in. Banks are similar in this respect, if every depositor wants their money back at the same time, not everyone can get their money back.
Why is SVB Unique?
For SVB in particular, the growth trajectory of its deposit base, the concentration of its customers, and the relative lack of risk controls around the portfolio are fairly unique factors.
SVB’s deposit base jumped from $49 billion at the end of 2018 to $189 billion at the end of 2021. Venture capital funding was at all-time highs during this period and start-ups receiving funding were often putting the proceeds into SVB bank accounts.
Putting that growth in perspective, SVB’s deposit base grew by approximately 57% per annum in this period while industry deposit growth was only 12% per annum. As well, close to half its deposit base originated from technology companies, the majority of which was from early-stage technology companies, making it more prone to a bank run.
As deposits grew rapidly at SVB, it increasingly purchased fixed-income investments.
The bonds they purchased (predominantly mortgage-backed securities) were high-quality, but long in duration, with the weighted average maturity over 10 years. Shortly after making these investments, central banks began one of their most aggressive rate hiking periods in history.
As interest rates rose, the value of these bonds fell. While in theory, the bond losses only existed on paper (if SVB held the bonds until maturity, they would get all their money back, plus interest), the “mark-to-market”, or unrealised, losses from these investments were significant, exceeding the company’s tangible equity capital.
Observing this, depositors became nervous and started redeeming their money, and SVB became a forced seller of many of those bonds to meet redemptions. The paper losses turned into actual losses and laid the foundation for the rush to the exit by SVB’s depositors.
ECB raises interest rates by 0.5%
The European Central Bank has raised interest rates across the eurozone by 0.5 percentage points, despite fears that higher borrowing costs could set off a domino effect across a banking sector already reeling from a collapse in confidence in Switzerland’s second largest lender, Credit Suisse.
Officials at the ECB, the central bank covering the 19-member euro bloc, said inflation was likely to remain high “for too long”, forcing it to continue with its planned run of rate increases.
The 0.5 percentage point rise pushes the bank’s main rate up to 3.5%, while the rate paid on eurozone bank deposits left at the ECB increases to 3%.
At its last meeting in February, the ECB clearly signalled its intention to hike the rate this month, but financial markets had been betting on a last-minute U-turn in light of this week’s turmoil.
The decision to push ahead with inflation control measures came hours after the Swiss Central Bank stepped in with a 50bn Swiss francs (£44bn) loan facility for Credit Suisse. The intervention was designed to calm fears over the finances of the lender, one of 30 banks globally deemed too big to fail.
Without referencing the overnight rescue loan, the ECB said on Thursday that its governing council was “monitoring current market tensions closely” and stood “ready to respond as necessary to preserve price stability and financial stability in the euro area”.
In a statement designed to quell fears over contagion in the banking sector, the ECB said: “The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”
Christine Lagarde, the president of the ECB, said the central bank would treat the heightened tensions in financial markets separately from its strategy for bringing down inflation.
While the ECB recognised a link between the two, Lagarde said: “We don’t see a trade-off between price stability and financial stability and handle them separately.
We are not waning on our commitment to fight inflation and we are determined to return inflation back to 2% target in the medium term.” She added that “there were three or four dissenters” on the ECB’s governing board who had argued for a pause in rate rises, but otherwise it “moved quickly” to a decision in favour of a 0.5% rise.
Fears over Credit Suisse, the world’s 17th largest bank saw heavy falls in the financial markets on Wednesday, with banking stocks across Europe taking a pummelling. The sell-off was triggered after the chair of Saudi National Bank, the largest Credit Suisse shareholder, ruled out any further investment.
The comments spooked markets as they came days after the collapse of the US lender Silicon Valley Bank.
While the share price rebounded on Thursday, in line with a cautious recovery in financial markets (FTSE up 2% at the time of writing) speculation is mounting that Credit Suisse will be forced to spin off parts of the business or consider a takeover.
Analysts at JP Morgan said withering confidence in its operations left the bank with three credible options: fully closing its investment bank, convincing the central bank to guarantee all of its customers’ deposits and potentially part-nationalise the lender, or welcoming a sale to larger Swiss rival UBS.
Spring Budget update
Chancellor Jeremy Hunt has abolished the pension lifetime allowance (LTA) and raised the annual allowance for pension contributions to £60,000.
Hunt also raised the money purchase annual allowance and the minimum tapered annual allowance, the former which limits the amount people can put into their pension tax-free after accessing their pot, from £4,000 to £10,000 from 6 April.
The adjusted income threshold for the tapered annual allowance will also be increased from £240,000 to £260,000 from next month. Rumours ahead of the Budget suggested he would raise the LTA from £1.07m to £1.8m to encourage over-50s to stay in work.
However, he has now announced it will be scrapped entirely. Hunt said the move would help keep more doctors at work. “I have listened to the concerns of many senior NHS clinicians that say pension tax charges are making them leave the NHS when they are needed the most. The NHS is our largest employer. But I don’t want any doctor to retire earlier because of how pension taxes work”.
The LTA capped the amount people could put into their pensions before facing a tax penalty. Individuals who breached the LTA – which was last set at £1.8m in 2010 but started to reduce in 2012, hitting £1m in 2016 – paid a 25% tax rate on regular pension withdrawals above the limit, and a 55% rate on amounts above the limit withdrawn as a lump sum.
Those working with NHS pension scheme members, including advisers said the penalties were deterring doctors from taking on extra shifts to cover staffing shortfalls since they feared facing the tax penalties Graham Crossley, NHS pension expert at Quilter, said:
“The NHS has played a critical role for the nation over the past few years during the pandemic and it’s only right that the government changed these unfair rules and eased its significant retention problems.”
“The changes to the annual allowance and the abolition of the LTA tie in nicely with some of the changes already tabled in relation to the NHS Pension Scheme and will see many lifted out of eye-watering annual allowance charges and no longer have to worry about the LTA at all”.
NHS strikes suspended after new pay offer
Unions have suspended further strikes by ambulance and other NHS staff and will recommend acceptance of a new pay offer to NHS workers.
The breakthrough follows days of talks with the Government over the long-running dispute over pay which has led to a series of walkouts by nurses, ambulance crews, paramedics, hospital porters and other health workers in recent months.
Ambulance members of Unison and Unite were due to strike next Monday and physiotherapists were going to walkout later this month but the action has been called off. Unison said the offer to NHS workers in England includes an additional one-off lump sum for 2022-23 that rises in value up the NHS pay bands.
There will be a permanent 5% pay rise on all pay points for 2023-24. Ministers said they could guarantee there will be no impact on frontline services as the result of the pay offer.
Union members will now vote on whether to accept the deal. Unison’s head of health Sara Gorton said:
“It’s a shame it took so long to get here. Health workers had to take many days of strike action, and thousands more had to threaten to join them, to get their unions into the room and proper talks underway. But following days of intensive talks between the Government, unions and employers, there’s now an offer on the table for NHS staff.”
“If accepted, the offer would boost pay significantly this year and mean a wage increase next year that’s more than the Government had budgeted for. This is better than having to wait many more months for the NHS pay review body to make its recommendation.”
“Unison will now be putting this offer to the hundreds of thousands of health members in the union in the next few weeks, recommending acceptance. In the coming days, health workers will have the chance to look at the full detail of what’s on offer and decide whether that’s enough to end the dispute.While that process takes place any planned industrial action will be paused.”
Rachel Harrison, GMB national secretary, said the Government has gone from refusing to talk about pay this year to putting an extra £2.5 billion on the table.
She said: “GMB members should rightly be proud of themselves. It’s been a tough road but they have faced down the Department of Health and won an offer that we feel is the best that can be achieved at this stage through negotiation.”
If the offer is accepted then it would meet a key GMB demand of a huge pay uplift for the lowest paid to keep them well above the Real Living Wage. Progress has also been made on non-pay demands, such as addressing violence in the workplace”.
This offer is far from perfect, and of course our NHS workers deserve more. GMB’s national committee is recommending that the offer be accepted – but the final decision belongs to our members. “Strike action will be paused until the outcome of the ballot.”
Jersey minister calls for one-month delay to housing trust’s 9% rent increase
The Housing Minister has intervened in a rental dispute by asking for a one-month delay in a 9% rent increase for Jersey Homes Trust tenants. Residents began receiving letters on Friday informing them of the rise, which is due to come into force on 1 April.
The move prompted Housing Minister David Warr to write to the JHT to request a delay in the increase. Deputy Warr described the 9% rent rise as a ‘chunky amount of money’ that ‘will have an impact’ on tenants. The trust owns and manages 839 social-rented homes across 24 estates.
Deputy Warr said he hoped to meet members of the JHT to discuss the increase and talk to tenants as well. He said: ‘”Initial talks will be with the JHT. I’m hoping there will be better communications between JHT and their tenants. The JHT should be able to explain their increases. I don’t know the costs on which it [the rise] is calculated. I need to meet the trust to discuss it in more detail.”
Deputy Warr added that the trust relied on rent to maintain and invest in property and said that there were ‘massive inflationary pressures’. A JHT statement said that its rent increase had been kept below the level of inflation, which is currently 12.7%.
Reform Jersey leader Deputy Sam Mézec has requested a meeting with the JHT.
He wrote a letter addressed to both the Housing and Social Security Minister. In it he said: “We are disappointed that more notice was not provided to tenants of this rent increase and, given how substantial it is, that no work appears to have been done with the Housing Advice Service to communicate with tenants about what rights they have, including what potential entitlement they may have for financial support through Income Support.”
Jersey Seigneur’s feudal title sold to US citizen in aid of Ukrainians
A Seigneur has sold his feudal title to an American citizen to raise funds for Jersey Overseas Aid’s humanitarian relief work in Ukraine. Sam Le Quesne sold the title of Seigneur du Fief ès Poingdestre’ to James Kaye, from Colorado, for an undisclosed sum.
Mr Kaye travelled across the Atlantic to appear before the Royal Court in person to officially complete the transfer. The sale of the title was conducted by sealed bids through lawyers appointed to handle the transaction, and there was a £25,000 reserve price.
The title of Seigneur du Fief ès Poingdestre is one of the few in the Island never to have been sold, passing down 19 generations by natural descent. While the title – attached to the Island’s most northerly fief from Sorel down to Sion – no longer comes with land, residential rights or property, it retains significant ceremonial value.
Its holder is required to attend the prestigious annual Assise d’Héritage ceremony in the Royal Court in September where title-holders acknowledge their duty to the Crown, known as ‘comparence’, in a ceremony normally presided over by the Bailiff with the Lieutenant-Governor in attendance.
The completed sale of Mr Le Quesne’s title did not require the formal consent of the Crown but it did need to be formalised by a unique contract passed before the Royal Court.
On completing the purchase, Mr Kaye said: “I’m incredibly honoured to be a small part of the rich and beautiful history of Jersey and very much look forward to building a future with the Island.”
He has also agreed to lend the Jersey Archive a parchment detailing the family tree of the Le Quesne family, who held the title of the Fief since the 1400s.
Towards the end of last year, Mr Le Quesne advertised the Seigneurship to donate the proceeds of the sale, once legal fees and other costs had been deducted, to Jersey Overseas Aid’s humanitarian relief work in Ukraine.
“I have such incredible admiration for the way the Ukrainian people have responded to what’s been happening to them,” he said at the time.
Advocate Carl Parslow, managing partner of Parslows, added: “We were delighted to represent our client in what was a very out of the ordinary transaction. It was a privilege to be involved in this interesting legal matter, especially as our client was willing to travel all the way across the Atlantic in order to appear before the Royal Court in person to acquire an important part of Jersey’s history.”
Sellers drop price of would-be record-breaking mansion
A Trinity mansion has had £8 million knocked off its price tag after being on sale for around 18 months. Maison de la Valette, a nine-bedroom property, sold for roughly £25 million in 2016 but returned to the market in September 2021. At the time, it was on offer for £39.9m.
Had it sold at that price, it would have become the most expensive home in the Island. The current high-price record is held by Eden House in St Brelade, which sold for £31m in April 2021.
Maison de la Valette is described by estate agents Wilsons Knight Frank as a ‘neo-classical-inspired property set in beautiful tranquil country surroundings’ and ‘one of the most important private estates in Jersey that carries international recognition’.
According to the agency, the property was completed in 2014 and internally renovated in 2019. It sits in the centre of grounds covering 18 acres, which feature two small lakes, and is approached by a long, tree-lined driveway.
The principal property is 21,000sq-ft and includes nine bedrooms, 14 bathrooms, and 12 reception rooms. There is also a separate building for staff, a 4,000sq-ft stables, paddocks, ponds and private woodland.
The property also features a wine store, cinema room, gym, swimming pool, a large games room, an office suite and an orangery.
Despite reports of ‘some strong lines of interest’ in January last year, the property is still on the market and the price has been slashed to £32m.If the latest price is met, the sale of the mansion would still trump Eden House’s £31m sale.
The property sold for £6m more than the asking price following a bidding war between two millionaires. It would also dwarf the £18.6m sale of Daisy Hill House in Grouville in 2015 – then the highest sale price seen in the Island.
High-value residents in Jersey are currently required to purchase a house worth a minimum of £2.5m and must make a tax contribution of £170,000 and have an income of at least £850,000 a year.
Restaurant that replaced a toilet block for sale at £3.5m
A Cafe and restaurant being built on the site of a toilet block at La Pulente – sold by the States for around £100,000 in 2014 – has been put on the market for £3.5m.
The toilets were demolished and a 120-cover restaurant is being constructed by the owners of Nude Food. Any sale of the site is conditional on the property being leased back to Nude Food for a minimum of ten years.
Nude Food bought the La Pulente building in January for £1.5m from a company owned by Frank Laine, a developer who had begun the project. Mr Laine was an investor in the company but is no longer involved.
Details of the sale opportunity were recently posted on Facebook, which stated that the property would attract a passing rent of £210,000 a year. The £3.5m price would reflect a yield of 6% before the purchaser’s costs are deducted.
The post adds that Nude Food is a family-run business set up in 2016 to provide healthy, nutritious food for everyone. Nude Food was co-founded by Lucy Morris and her fiancé, Jackson Lowe, whose carpentry and construction business is the contractor for the development.
Recently, Ms Morris said the venue would be open seven days a week serving breakfast, lunch and dinner and would have a ‘beach-club vibe’ with a decor that included lots of natural colours, rattan furniture and a Mediterranean-inspired mosaic floor.
The brochure adds that all kitchen equipment is now on site and all furniture has been ordered. Menus are designed, staff are trained and policies and procedures drafted, it says.
A nearby kiosk, The Hideout, used to be based close to the toilets but moved further down the slipway access road when work to redevelop the building began. Its owner, Karl Sutton, recently received planning permission to remain until 24 June but it must move within 28 days of the Nude Food restaurant opening.