Why so many banks failed in 2023?
The largest cumulative banking collapse in modern US history, along with the defeat and subsequent sale of Credit Suisse, represents the worst year for banking since the 2008 financial crisis.
The failures of Silicon Valley Bank and Signature Bank in March 2023, followed two months later by First Republic Bank, marked the worst US banking crisis in its modern history. The total assets held by the three banks amounted to more than 450bn euros. Adjusted for inflation, this number exceeds the holdings of the 25 banks that collapsed during the 2008 global financial crisis.
The financial markets were panicking, central banks were mobilised, while the US administration called for calm and put in place a series of emergency measures to strengthen confidence in the banking system. To stop the flight of deposits and avoid contagion to other banks, which would have a domino effect, the US regulators launched a one-off initiative to guarantee 100% of deposits.
Meanwhile, on the other side of the pond, Credit Suisse was in free fall. The financial institution’s sharp stock market decline has halved the value of its shares, while the restructuring announced by the bank’s management did not prevent a flight of hundreds of millions of euros in deposits.
The Swiss National Bank (SNB) approved emergency funding of up to 57 billion euros to bolster Credit Suisse’s liquidity amid the banking crisis. A few days later, UBS absorbed its banking counterpart in a rescue operation designed to prevent its demise.
Holding US Treasuries as collateral
A large part of SVB’s business model was based on investing the money of its clients – mostly tech start-ups with a lot of liquidity – in long-term fixed-income deposits. After decades of very low, or even negative, interest rates, it was a very lucrative business. At the end of 2022, this institution had a total of $160 billion in deposits, half of which was invested in US Treasury bonds and mortgage-backed securities.
In the context of the global crisis and subsequent interest rate hikes by the Federal Reserve to combat inflation, the price of money became more expensive and investment was reduced. As a result, many of these start-ups suffered from a lack of funding or wanted to get more return on their deposits. This led many of them to withdraw more funds than the bank had planned, thus forcing the financial institution to sell a large part of these investments in public debt before maturity and at a discount to return the deposits.
Fears that the bank would not have enough cash to return the money to customers who asked for it caused panic and the withdrawal of 41 billion dollars in just one week. The bank sold a bond portfolio valued at 21 billion, just to cover its liquidity, at a loss of 1.8 billion. A rapid deterioration of the bank’s balance sheet led to its collapse.
Since the 2008 financial crisis, certain supervisory rules were relaxed for mid-size banks such as SVB. The regulation under which they were operating did not require them to recognise any of the losses they were taking on those bonds that were dropping in value as rates went up.
In the case of Credit Suisse, and beyond the lack of investor confidence due to the negative figures and doubts about the bank’s funding capacity, the bank had long been in the red due to a string of scandals and a series of fundamental management errors that castrated its ability to recover after the downturn experienced by the investment banking sector in the wake of the health crisis.
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