The collapse of the Silicon Valley Bank -SVB- was undoubtedly an event of considerable relevance that surprised the financial world. In addition to being the first bank collapse in the United States since the 2008 crisis, it occurred at a very delicate moment for the Federal Reserve, as it jeopardized its commitment to inflation control through rate hikes.
In short, the events at SVB can be analyzed in four phases. The first one derives from a scenario that combines low interest rates with a sharp increase in the demand for technological goods and services during the pandemic. As a result, this industry, which is the bank’s main segment, expanded its deposits from US$ 62 billion to US$ 198 billion between late 2019 and March 2022.
As for the second phase, during this same period, the bank decided to make significant investments in long-term treasury bonds. However, the yield rate went up with inflation rates, high price expectations, and the hikes in the FED rates. The 10-year bond yield rate rose from 0.5% to 4.0% between June 2020 and February 2023. Regarding this aspect, it is worth mentioning that this movement reflects inversely in their price, so in essence, the bank bought high and sold low.
Chart 1. Own elaboration
The third phase stems from an increase in withdrawals by tech companies, another consequence of the rising rates that make financing more costly, requiring the use of resources that were kept in the bank.
Finally, the fourth phase is the run that took place when the bank announced that it had sold a significant portion of its loss-making bond portfolio and would sell US$ 2.25 billion in new shares to correct its finances. This led to a selloff of stock, which dropped 60% and was withdrawn from trading, as seen in chart 2. It should also be noted that although the Federal Deposit Insurance Corporation – FDIC allows coverage for deposits of up to $250,000, 80% of these deposits were not protected by this insurance, which only worsened the situation.
The concern of a potential spread has particularly affected regional banks, which face the lack of confidence of depositors who are withdrawing their money to take it to bigger banks such as the Bank of America, Morgan Chase or Wells Fargo, which they consider safer in this context. The First Republic Bank, for example, experienced a share price collapse, losing US$ 17 billion in market value so far this month, and the possibility of saving it with a government-driven deposit of US$ 30 billion made by 11 of the largest banks has been mentioned.
Chart 2. Own elaboration
Another case of a crisis of confidence in a very different bank in terms of its business model and size is that of Credit Suisse, which has been affected by the turmoil derived from SVB. This bank has been struggling for a couple of years due to money laundering scandals and has reported a loss of 7.29 billion Swiss francs in 2021 and 2022. This led clients worldwide to pull 110 billion francs during the fourth quarter.
The trigger for its stock drop by around 24% was a declaration stating that “weaknesses” had been found in its financial reporting process, along with comments made by the Saudi National Bank, its largest shareholder, on its regulatory impossibility to inject more capital. These developments led to a confidence-boosting move by the Swiss National Bank, which said that it was willing to lend up to $54 billion in liquidity if necessary.
The Fed’s Decision
Finally, in its March 22 decision, the Federal Reserve, or Fed, decided to increase its rate by 25 basis points, taking the upper range to 5.0%. Jerome Powell suggested that the hiking cycle may be coming to an end. This change of stance shows concern for preserving the financial system’s stability, given that after his appearance before Congress three weeks ago, it was taken for granted that the increase would reach 50 points and the end of the cycle was still distant.
While both the Fed and various central banks and governments around the world have taken action to prevent deterioration and spread within their financial systems, this chapter is far from closed, as fears remain, especially in the United States regional bank segment, which will undoubtedly require further action in the future, and in the implications of the Credit Suisse purchase both from a financial and regulatory point of view for Switzerland.
