Has the latest banking crisis been averted?
Anyone following the Signature Bank collapse & the Silicon Valley Bank run and now the Credit Suisse issues, will be amazed at the speed in which it all happened, and like me will be wondering how have we ended up here again 15 years after the 2008 banking crisis?
Why did this happen?
Modern technology now means that a “bank run” can happen much quicker now than in 2008, when people still needed to queue in line to withdraw their money, with bank staff at the counters instructed to “take their time”.
Now people have the ability to withdraw their funds from a click on their phone, with virtually instantaneous wire transfers. This allowed 42 billion dollars to be withdrawn in a single day on Friday 10 March 2023.
Credit Suisse confirmed that in February 2023 alone customers withdrew 110 billion Swiss francs. Also, in the United States, First Republic bank have seen $70 billion dollars withdrawn from its accounts in a matter of days, which represents roughly 40% of their liquidity.
These examples demonstrate that any erosion of trust in a bank can very quickly lead to rapid liquidity issues.
Rising interest rates
In the case of SVB, they were paying 0.5% interest on their deposits, whilst other banks were paying up to 5%. This led to many depositors and especially tech firms removing their money from SVB to higher interest accounts, seriously impacting SVB’s liquidity.
Invested into long term Government bonds
SVB invested heavily into Government bonds, which are now underwater. This impacted their ability to meet their short term liquidity commitments, leaving depositor funds exposed, which inevitably caused depositors to remove their funds.
What action was taken?
The US Government, the Federal Reserve andthe Federal Deposit Insurance Corporation (FDIC), said in the case of SVB the Government would back depositors beyond the federally insured ceiling of $250,000, with the bank having deposits of more than $175 billion, this ceiling appears to be infinite in this case.
Senator Elizabeth Warren has since called for the FDIC limit to be increased above the current $250,000 for the whole banking sector. This is intended to calm depositors, but critics argue in the longer term it could further increase risky practices by the banks with depositors funds.
Equity investors / shareholders in SVB lost their funds. The impact of this has been large percentage falls in the share price of some banks, with shareholders now realising this effective bail out looks much different to that in 2008, with only depositors protected and shareholders assuming all the risk. Santander was down 10% at one point on Monday 13 March 2023.
HSBC has purchased the UK arm of SVB for a symbolic £1, which makes an already huge bank even bigger.
In the case of Credit Suisse, they have been taken over by UBS in a deal worth $3.25 billion, having previously been given a $54billion loan by the Swiss Central bank only last Thursday on 16 March 2023. This has been described as an “unlikely alliance” with Sky News business reporter Ian King writing that it is like “merging Manchester United with Liverpool”.
Governments will be hoping these actions will halt the contagion. However, I suspect there may be more action taken in the coming days/weeks and months and I would surmise that some of the biggest banks in the world are about to become even bigger.
Gildernew & Co. Ltd make every effort to ensure the accuracy of the information herein. However, no reliance should be placed on any of the above without seeking independent professional accountancy, legal and/or financial advice.
Posted on March 24, 2023