Crises at banks

2023-03-29 at 11:07 

In recent weeks, we have received news of crises threatening a number of banks. People wonder if this means a new banking crisis or if it is just a crisis affecting a few banks. After all, there is a big difference between the two. Is there cause for concern in the financial and investment markets or are these developments only isolated cases?


Silicon Valley Bank

After a sustained period of success, a major US bank ran into problems. Silicon Valley Bank (SVB), with more than USD 200 billion in assets, faced insurmountable challenges in its operations and fell into the hands of the authorities. The USA has not seen a problem of similar magnitude since the 2008 financial crisis.

Based in California, Silicon Valley Bank is the 16th largest bank in the United States. The bank was taken over by the Californian authorities and the FDIC (Federal Deposit Insurance Corporation) on Friday 10 March 2023. The guaranteed deposits were transferred to a new bank, whereas the actual banking operations will be put out to open tender following the regular procedure applied by the FDIC.

Of the total of USD 170 billion deposits held by the bank, only 10 per cent were guaranteed. In the United States, the FDIC guarantees deposits up to USD 250,000. In the early days of the crisis, the US authorities announced that all deposits in the bank were safe.

SVB's clientele included companies and funds active in the venture capital (VC) sector. The company itself advertised that its clients accounted for about half of all technology and life science companies engaged in the VC sector. After a long stretch of good years, the industry has been struggling lately. This is not, however, why the bank is in trouble.

The biggest problem for the bank was posed by the general rise in interest rates. At the beginning of 2022, the 10-year US federal rate was around 1.5 per cent, only to rise to 3.5 per cent by the end of the year. As we see, the increase is substantial. SVB held USD 120 billion in government bonds, asset-backed instruments and other similar securities. They have fallen in value to the extent that at the end of 2022, the unrealised and off-balance sheet losses on these securities reached over USD 15 billion, an amount equal to the company’s equity. The bank’s risk management system failed. For some unfathomable reason, the markets did not notice this until March, even though the situation was already apparent in the reports released in the autumn.


State of the US banking system

The US banking system is in better shape than it has been in more than 25 years. The banks’ average equity is approx. 9 per cent of total assets. Before the financial crisis, it was closer to 3 per cent for large banks. So, a lot of positive progress had been made.

The general rise in interest rates has made the banking system less stable. According to the FDIC, the US banking system harbours USD 620 billion in unrealised losses on securities. At the same time, the aggregate equity of the system is EUR 2,200 billion. Unrealised losses will only materialise when the bank carries out a securities transaction or merger or runs into trouble. Under normal circumstances, unrealised losses are not realised when the bank holds the securities until maturity and then recovers 100 per cent of their value. While these securities are virtually risk-free, their real market value varies in response to interest rates. 

As a result of the crisis facing SVB, the banking sector may have to regroup, compelling the regulatory authorities to occupy centre stage. The ways of working and indicators will have to be reviewed, once again.

SVB was, however, a special case. SVB may soon be joined by other banks if the real estate and housing markets continue to falter. Many regional banks depend on these markets for their business. The US housing market peaked last summer. The rise in interest rates has caused housing prices to fall, especially in the most high-priced areas and on the west coast. So far, the decrease in prices has been moderate.


Rising interest rates wreak havoc

Overall interest rates had been falling for two decades. The markets trusted that the rates would remain low for a long time to come. However, the situation was reversed as a result of the energy war launched by Russia in the autumn of 2021 and the attack on Ukraine in February 2022. Inflation accelerated, especially in Europe, driven by rising energy prices.

In the United States, inflation stems from a strong economy, low unemployment and a post-Covid boom. The price of energy was an added boost. For some time now, the US Federal Reserve has been trying to slow down the economy and even succeeded in curtailing inflation.

The impacts of the overall rise in interest rates are visible across the board. The housing market is declining at the same time as the stock markets are falling and technology stocks have collapsed. At one point, the UK pension system was on the brink of crisis and now the problems of the Californian SVB have highlighted the potential balance sheet problems of banks.


In conclusion

Silicon Valley Bank made big mistakes in its own operations. Also, external factors contributed to the problems.

Europe is facing a crisis in the form of Credit Suisse Bank. Its problems culminated in a massive withdrawal of deposits during the past few weeks. Finally, the bank, propelled by the authorities and the central bank, was taken over by USB. However, it is interesting to note that this is more a crisis of a single bank than a general banking crisis.

Credit Suisse’s fate seems to have nothing to do with the problems facing US banks or the overall increase in interest rates.

The rising interest rates are having a widespread impact. Many operators were lulled into a false sense of security convinced that interest rates would stay low for a long time. This changed last year. Now it is hoped that the inflation rates will come down, and the interest rates with them. Failing that, there is a risk that the crises facing individual banks could escalate into an unpredictable banking crisis.

The writer is VER's CEO Timo Löyttyniemi.

TLö blogi 2020

Recent posts

Tags

acceleration active investing added value AI alternative investments asset classes austerity measures authoritarian governments baby boom baseline capitalism carbon border tax carbon emissions carbon footprint carbon intensity carbon neutrality carbon risk carbon tax carbon-neutral economy carbon-neutrality central banks circular economy climate change climate commitments climate crisis CO2 emissions collateral commercial paper market commodities concentrated markets contingency plan contrarian corona crisis coronavirus coronavirus crisis countermeasures covid crisis covid economy crises crisis crypto currencies currencies debt burden debt structures decision-making defence industry defence technology democracy demographic trends demography dependency ratio depression derivatives development digital money digitalisation dilution disease monitoring system diversification ECB economic competition economic development economic growth economic policy economic system economy effective treatment electricity exchanges emergency measures employment figures energy export energy exports energy imports energy prices energy war environmental policy equity market equity markets escalation ESG EU euribor exchange rates expected returns external borrowing FAAMG Fed financial crisis financial market financial markets financial stability fiscal policy fixed income investments fixed-income investments forecasting fossil fuels free trade funding ratio geopolitics global trade globalisation globalization government debt government finances green technology green transition growth healthcare systems hedge funds illiquid assets increase in prices indebtedness index investing index weighting indices inflation institutional investor institutional investors interest level interest rate interest rate level interest rates internal market international trade investment beliefs investment environment investment returns investment risk investments investments contribution approach level of risk liberalism long-term return low-carbon economy market crash market economy market forces market interest rate market movements market portfolio market rallies market reaction megatrends miracle momentum monetary policy ownership policy pandemic pension investments pension investors pension liability pension promise pension system pension systems planning political decision-making portfolio structure positive side effect predatory traders pre-funding preparedness presidential elections price fall private equity private markets protectionism real estate investment real estate investments real estate market real estate sector recession regulation renewable energy renewable natural resources rescue packages responsibility restrictions returns on investments risk bearer risk level risk management risk profile Russia sanctions scenarios security investments short squeeze sovereign debt spill-over effect stagflation state state ownership stimulation stimulation packages stock market stock markets stock prices stock-exchange markets stocks strategic allocation strategic autonomy strategy success support measures supportive actions sustainability taxation the leading powers timeframe for liabilities timing totalitarianism transition risk uncertainty venture capital virus war war of aggression welfare state