The bank failures and rescues in US and Europe over the last two weeks have wobbled financial markets and unnerved investors, probably, for the right reasons. The events, to a certain degree, are reminiscent of the events of early 2008 that triggered the 2008-2009 global financial crisis.
It all started with Silvergate Capital, a bank that lends to crypto firms, which announced on March 8, 2023, that it is winding down its operations and liquidating its assets. The bank assured depositors that all deposits will be repaid in full. The bank had $12 billion in assets.
The next bank to get into trouble was Silicon Valley Bank (SVB), a bank that primarily serviced the startup and venture capital industry. It had $210 billion in assets and was the 16th largest bank by assets in the US. The bank got into trouble when its announcement of a $1.8 billion loss on a recent bond sale caused panic among its depositors triggering large customer deposit withdrawals. The U.S. regulator, Federal Deposit Insurance Corporation (FDIC), to protect depositors took over the bank on March 10, 2023.
This was followed by Signature Bank, a regional US bank, with assets of $110 billion, catering largely to the real estate sector and law firms, which was too taken over by FDIC on March 12, 2023. Investors and depositors got concerned, after the failure of Silicon Valley Bank, about the health of Signature bank as it had a large number of uninsured deposits on its book and its exposure to crypto and tech-related lending. On March 20, 2023, FDIC announced that they have found a buyer for the 40 branches of Signature Bank in New York Community Bancorp.
The next in line was First Republic Bank whose stock had lost 80 percent since the failure of Silicon Valley Bank. The bank has lent out more money than it has in deposits causing investors and deposits to be concerned about its health and sustainability. First Republic Bank has $213 billion in assets, is the 14th largest bank in the US, and focuses on the real estate and mortgage sector.
The US treasury and central bank concerned about the adverse impact the failure of First Republic Bank can have on the entire US financial sector brokered a $30 billion deposit infusion into the bank by the top 11 US banks. The top 4 banks – JPMorgan, Bank of America, Wells Fargo, and Citibank – will together contribute $20 billion ($5 billion each) of the $30 billion.
Not many are convinced by the deposit infusion into First Republic bank. Despite the capital infusion, S&P Global cut its ratings on First Republic bank to “junk” status. It believes the $30 billion deposit infusion will only ease short-term liquidity challenges for the bank, and may not solve its substantial business, liquidity, funding, and profitability challenges.
Meanwhile, the biggest event so far of this saga was unfolding in Europe. Credit Suisse, which has been in trouble for some time due to various scandals, losses, and mismanagement, had to tap a $54 billion credit line from Swiss National Bank – the central bank of Switzerland – to ease its liquidity troubles from large customer deposit withdrawals. But the credit line from Swiss National Bank wasn’t enough to ease its troubles and the Swiss regulators hurriedly brokered a deal during the weekend for Credit Suisse to be acquired by its bigger Swiss rival UBS at $3.2 billion in an all-stock deal. The Swiss National Bank will lend $108 billion to UBS to enable it to complete the deal.
Credit Suisse has a global presence with around $500 billion in assets and 50,000 employees around the world, unlike the troubled/failed US banks which were regional banks catering to niche markets.
Now the real question is: Have the central banks, regulators, and governments through their decisive actions of the last two weeks stopped the contagion of troubles at these banks to the broader global financial system?
This is where we stand now (20 March 2023):
- FDIC took over Silicon Valley Bank and Signature Bank in the US and has found a buyer for the 40 branches of Signature bank.
- Swiss banking regulators brokered a deal for UBS to acquire the troubled Credit Suisse for $3.2 billion in an all-stock deal. The Swiss National Bank will lend $108 billion in support for UBS to complete the deal.
- US regulators persuaded the top 11 US banks to make a $30 billion deposit infusion into the troubled First Republic Bank to resolve its liquidity.
In 2008, when Washington Mutual bank failed which is the biggest bank failure in US history, the Fed and US treasury brokered its sale to JPMorgan. But that didn’t stop the contagion of problems that emanated from the US subprime mortgage market which finally culminated in the global financial crisis of 2008.
The failure of Washington Mutual bank was followed by the failure of Bear Stearns which too was acquired by JPMorgan at a throwaway price. The failures continued, the biggest being the bankruptcy of Lehman Brothers in September 2008. There were 250 bank failures in the US during 2008 – 2009.
Whether the events of last week will lead to a situation as severe as 2008 is something we have to wait and see. The Swiss National Bank was convinced about the strength of Credit Suisse’s balance sheet and financial position just a day before the bank tapped a $54 billion credit line because of liquidity troubles. If they can’t see it coming, what about us?
AMN CAPITAL 