My dear Friends,

we live in uncertain times, that´s for sure. Admittedly I am kind of getting used to it and try not to freak out too much.

But the recent collapse of Silicon Valley and Signature Bank, followed by really worrying news from First Republic and Credit Swiss, two other banks, got me a bit giddy.

Are we heading to yet another banking crisis? Who will bail out the banks this time, and will it work after all this bailing out that has already happened during the 2008 banking crisis?

There are plenty of unanswered questions! Do we need to rethink portfolio strategies, or should we sell everything and put the money under the mattress?

Should we worry, or is it just the media sowing yet again investor worries?

Bank Runs and Collapses

No, it is not a 1929 panic. But admittedly, a similar kind of mass hysteria, only this time inspired and made worse by online media. March 2023 will probably be remembered by historians as the month of multiple bank collapses.

Before we dig deeper, I have to point out that neither bank was in similar or related business sectors or connected in any way.

So each has its own “collapse history”. However, ultimately, their stories have connection-rising interest rates.

#1 Silver Gate Bank

The bank was founded in 1988 in California as a small local lender but had soared to become one of the biggest banks in the crypto industry. Silvergate Capital had become a central lender to the crypto industry. As token prices boomed, deposits at Silvergate surged from around $2 billion in 2020 to over $10 billion in 2021.

On January 5, its stock price dropped 40% after the company confirmed in a quarterly report its customers had withdrawn $8.1 billion between September and December. Bankrupt crypto exchange FTX was a major Silvergate customer.

During a regulatory filing, the bank admitted to being “less than well-capitalized,” leading shares to fall another 57% between March 1 and March 3, from $13.53 to $5.77.

Silvergate’s share price had fallen by 98% from its November 2021 peak. Amongst other clients, several major crypto companies—including Circle, Coinbase and Paxos—announced they would end their relationships with Silvergate. They blamed the bank’s delay on a financial filing and its admission that it was concerned about its future.

On Wednesday, March 8th 2023, Silvergate Capital announced that it would “voluntarily” wind down operations in an “orderly” way and liquidate its Silvergate Bank. According to the shared liquidation plan, all deposits would be fully repaid and would consider “how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.”

Silvergate’s management thought it had prudent policies to ensure the safety and accessibility of its deposits. The management team stated that it had structured its balance sheet to withstand a 70% deposit drawdown and kept cash reserves exceeding all remaining deposits. 

Whodunnit: Collapse of FTX, questionable Alameda transactions that took place on the SEN network, low solvency, interest rate risk on the asset side, social media, devastating bank run, delayed annual report, clients loosing confidence, bad risk management

#2 Silicon Valley Bank

SVB was founded in 1983 and was the 16th largest U.S. bank before its collapse. The Bank was a leading provider of banking and financial services to the technology and life sciences sectors. A sector that had become the focus for many VC firms during the low-interest rate environment.

The bank provided financing for about half of all U.S. venture-backed technology and healthcare companies. Because SVB supported startup companies that not all banks would accept due to higher risks, it had become a preferred bank for the tech sector.

Based in Silicon Valley, SVB had assets totalling $209 billion at the end of 2022.

SECURITIES

The bank had parked $91 billion of its deposits into long-dated securities such as US Treasuries and agency mortgage-backed securities. Usually considered safe! But these securities had decreased considerably in value since SVB purchased them because of the FED hiking interest rates to combat inflation.

The fact is that these bonds labelled ” held to maturity” had lost – on paper- so much that the bank was already bankrupt. But due to accounting rules, SVB did not have to recognize paper losses on those bonds. In simple terms, accounting-wise, the bank was not bankrupt, despite being, in fact, already bankrupt.

As interest rates rose, the tech market corrected, and VC funding -a major source of deposits for SVB- dried up. Many bank customers began to close their accounts and withdraw money.

However, SVB didn’t have the cash on hand to liquidate these deposits because they were tied up in the above-mentioned long-term investments.

To remedy the situation, SVB decides to sell bonds even at a significant loss. In fact, SVB sold $ 21.8 billion at a loss of $1.8 billion. This loss was more than the bank’s entire net income in 2021.

Again, the bank tries to “make ends meet” and launches a $ 1.75 billion stock sale to compensate for the losses and raise cash. This was a bad idea!

In spite of this reality, there has been little self-reflection on the part of the industry that was so closely tied to Silicon Valley Bank. And in the midst of these immature excuses from VCs and shallow recriminations from billionaire investors, the seeds of the next bubble are being planted. 

Linette Lopez, Journalist , Business Insider

THE RUN

Too many investors had already lost all confidence in the bank. Most of the board members, investors, founders, etc., started advising everyone to remove all the funds from SVB via social media. To name a few, venture capitalists like Peter Thiel and Arjun Sethi explicitly advised their portfolio companies to jump ship and quickly withdraw their funds from SVP.

Unlike personal banking, SVB’s clients had many accounts larger than the insured $250.000 FDIC limit. So, it didn’t take long for a bank run to rescue the uninsured deposits. The escalating pace of withdrawals caused a snowball effect.

On March 7th, after its capital raising announcement, the bank’s share took another hit and lost 60% in value. By March 10th, 2023, SVB collapsed within 24 hours.

It will stay collapsed, and the remaining assets will go to creditors. A buyer can bring it back to life if another bank purchases it.

So far, HSBC will buy SVB´s UK – excluding its assets or liabilities.

Whodunnit: lack of diversification, to many hold-to-maturity 10 year securities, lack of confidence, bank run, interest rate hikes, accounting regulations, social media, uninsured deposit bases, panic, lack of liquidity, accounting rules

#3 Signature Bank

New York-based Signature Bank has served as one of the two main banks for crypto companies, along with Silvergate Bank. The difference, however, was that Silvergate had just over $11 billion in assets, compared with over $114 billion at Signature. 

Signature Bank was founded in 2001 as a more business-friendly alternative to the big banks. The New York-based ” old school bank” had 40 branches, assets of $110.36 billion and deposits of $88.59 billion(2022). The bank was amongst the 20 largest banks in the US.

More than 80 per cent of its clients were “middle market businesses, such as law firms, accounting practices, healthcare companies, manufacturing companies and real estate management firms.”

“We had no indication of problems until we got a deposit run late Friday, which was purely contagion from SVB,” 

Barney Frank, Signature bank Board Member

In 2018, the Bank was one of only a handful of banks allowing customers to deposit cryptocurrency (crypto) assets. This boosted deposit growth by 67%. The bank created a 24/7 payments network for crypto clients and had $16.5 billion in deposits from digital-asset-related customers.

As of September 2022, almost a quarter of Signature Bank’s deposits came from cryptocurrency. This caused the bank’s stock to fall amid the FTX contagion. After its all-time high in early 2022, Signature´s stock plunged to less than one-third by late February 2023.

On Friday, 10th March 2023, Signature Bank customers, spooked by the sudden collapse of Silicon Valley Bank, withdrew more than $10 billion in deposits.

That run on deposits quickly led to the third-largest bank failure in U.S. history. Federal regulators closed the failed New York-based Signature Bank on March 12th.

Flagstar Bank, a New York Community Bancorp subsidiary, entered into an agreement with federal regulators on March 19 to purchase deposits and loans from Signature Bridge Bank, N.A.

Whodunnit: overexposure to crypto currency, interest rate risk on the asset side, clients loosing confidence, social media, Silicon Valley Bank contagion, devastating bank run, money laundering accusation, crisis of confidence in the banks leadership(authorities)

#4 First Republic

First Republic was one of the banks to be swept up in the contagion that followed the March 10 failure of Silicon Valley Bank because of some similarities, including their size, their largely wealthy client base and the largely uninsured nature of their deposit bases.

San Francisco-based First Republic was the 14th-largest bank in the US. The bank catered mainly to the wealthy, and exactly this contributed to their problems.

“It’s the biggest example of a bank that could go down and shouldn’t go down — a first-class bank,”

Meber of the saviour consortium

The high net-worth people who bank there are “particularly trigger prone”. Both clientele and investors saw similarities between First Republic and the failed Silicon Valley Bank- the other midsize Bay Area-based lender with a deep-pocketed client base.

“They’re sophisticated, they know they have other options, and they have mechanisms in place to move money quickly.”

Patricia Mccoy, lawprofessor, boston Colleg

68% of First Republic’s deposits were uninsured. Despite this being far less than the 94% uninsured that Silicon Valley Bank had, First Republic had an additional problem, an unusually large 111% loan-to-deposit ratio at the end of last year. Meaning it has loaned out more money than it had in deposits. This was not so good news.

The fact that investors usually consider this kind of wealthy clientele a risk because they are “particularly volatile.” They ask for withdrawals and take their money elsewhere if they smell trouble. Now, this was the time when investors sold their First Republic stocks in large quantities. Within 10 days, the bank had lost 90% of its stock value.

Like Silicon Valley Bank, First Republic had invested the deposits in long-dated securities such as US Treasuries and agency mortgage-backed securities.

Due to rising interest rates, securities/bonds had lost value. So even if First Republic sold all its securities, it would never have been able to pay back depositors fully.

THE BAILOUT

To shore up confidence in the financial system and contain further fallout, Treasury Secretary Janet Yellen suggested enlisting the private sector for help. She then proposed the idea to Jamie Dimon, the C.E.O. of JPMorgan Chase, which had extended the bank a credit line this week. Dimon started calling other C.E.O.s to raise the money.

In fact, it was a page from a well-tested playbook. In 1907, J. Pierpont Morgan and his allies bought up $30 million worth of New York City bonds to stem a widening financial crisis. In 1984, big banks and the Chicago Fed provided more than $5 billion to Continental Illinois. And in 1998, banks banded together to invest $3.6 billion in Long Term Capital Management.

On March 16th, First Republic announced that it had received $30 Billion from a ” large group of banks” this was in addition to the $ 70 Billion borrowing capacity the bank had negotiated with the FED and JP Morgan.

Hopefully, this move will not only give First Republic more wiggle room to fulfil withdrawal requests, but it should also help calm the nerves of its uninsured depositor base.

If this is solving the banking industry´s problem? Probably not because other banks face similar problems to Silicon Valley Bank. Another 190 banks are in danger of failure even if half their uninsured depositors withdraw their funds.

Whodunnit: mass hysteria, too little client diversivication, lost confidence, interest rate risk on the asset side, Silicon Valley Bank contagion, uninsured deposits, investments in long- running securities, unusually large loan-to-deposit ratio

#5 Credit Swiss

A spillover from the US banking problem? Definitely not; Credit Swiss problems are homemade and have lingered for years.

THE STORY

The 167-year-old bank crashed in slow motion over the years. Founded to provide domestic private funding to build the Swiss railroad, the bank has a long and faceted history of scandals and accusations of mismanagement.

The Credit Swiss Group was amongst the world’s biggest banks, with a focus on private banking, investment banking and wealth management.

The bank is headquartered in Zurich, Switzerland. In 1870 the bank opened its first branch outside Europe in New York. Today Credit Swiss is globally interconnected and has branches in China, Africa, and India.

SCANDALS GALORE

1996 the bank was involved in a lawsuit concerning problems survivors of the Shoa or their relatives had in retrieving their assets from the bank. Ultimately, Credit Swiss had to pay $1.25 billion to the claimants.

In early 2000, Credit Swiss was investigated for helping foreign nationals with tax evasion. 3500 “relationship managers in countries like Ukraine, Venezuela, Egypt or Thailand “offer” tax evasion schemes to the financial elite. Subsequently, 13 Credit Swiss employees were arrested in Brazil. The US Justice department accused and convicted four Credit Swiss bankers for assisting with tax evasion. Germany ultimately fined Credit Swiss Euro 150 Million for helping their citizens to avoid tax payments via a Bermuda-based subsidiary.

As to the 2008 financial crisis, US authorities investigated and sued Credit Swiss for bundling mortgage loans with securities. Since the financial crisis Credit Swiss-like other banks -was losing consumer and market trust.

QUITE A RECORD

MATERIAL WEAKNESS

It can be said that Credit Suisse has given its investors plenty of reasons to worry over the years, mainly because of its attitude to risk management. Months before the final showdown, Credit Suisse had promised an ambitious plan to turn around the scandal-ridden bank.

However, In October 2022, the bank had to fight rumours that it was in financial trouble. As a result, Credit Swiss´ shares tumbled.

This seemed to have been the right moment for the Saudi National Bank because they bought a 9% share package.

However, other investors and a number of Credit Swiss customers had lost confidence in the bank’s ability to get the internal control system, and their appetite for risk reigned in.

“the group’s internal control over financial reporting was not effective”

Credit Swiss, Annual Report 2022, Published March 2923

From October 2023 – December 2023, clients withdrew 110 billion Swiss francs. By early March 2023, the bank had to delay the publication of the annual report after a last-minute query from the US Securities and Exchange Commission over cash flow statements for 2019 and 2020.

“material weakness could result in misstatements of account balances or disclosures that would result in a material misstatement to the annual financial statements of Credit Suisse,”

Credit Swiss, Board Statement, Annual Report

THE SAUDI BANK

During an interview in March 2023, the Saudi National Bank declared that they see no reason to inject further funds into the bank. Ammar Abdul Wahed Al Khudairy, CEO of Saudi National Bank, said the bank had sufficient funds and did not need more money. The Saudi National Bank CEO also claimed regulatory, and compliance reasons would not allow them to do so anyway.

“Well we can’t…We cannot, because we would go above 10%. It’s a regulatory issue.”

Ammar Abdul Wahed Al Khudairy, CEO Saudi National Bank

Whatever the reason, this comment turned Credit Swiss shares into a tailspin. Over 12 months, the bank’s stock prices had already plunged 67%; now, they plunged even more.

By March 2023, the bank’s financial health is again under the microscope following the demise of Silicon Valley Bank and possible spillover effects on global financial markets.

A SHOTGUN WEDDING

Suddenly, everything happens extremely fast. Under pressure from the ECB, who wanted to avoid yet another global financial crisis, the Swiss Central Bank gave SFR 50 billion under a covered loan facility and a short-term liquidity facility.

Neither the loan facility scheme nor the injection of liquidity did the trick. In fear of another global banking crisis, the ECB, the US Federal Reserve, and other central banks force the Swiss government to act. The reason is the Financial Stability Board(FSB) categorizes Credit Swiss as a “global systemically important bank.” Along with 30 others, including JPMorgan Chase, Bank of America and the Bank of China.

On Sunday, 19th of March, UBS Group AG is forced by the Swiss Government and Bank regulators to take over its longtime rival Credit Suisse Group AG. UBS was pushed into the biggest banking deal in years by regulators eager to halt a dangerous decline in confidence in the global banking system.

Whodunnit: bad risk managment, weak internal control, lost trust and confidence, scandals, hybris

Investor´s worries

Most investors do remember the banking crisis of 2008 – a lot of money was lost then, and governments and central banks were struggling to keep the global economy running.

Is history currently repeating itself? Did we, respectively, banks and regulators, not learn anything?

The fact is a lot was learned from 2008. For one, bank regulations are far stricter today than they were then. The G20 introduced a comprehensive global framework for global regulation.

The measures introduced range from more and better regulatory capital requirements to how financial institutions should be resolvable in an orderly manner without severe systemic disruption.

However, there is no such thing as 100% safety, and ultimately, human beings make the decisions. So serious mistakes are being made by default, and banks can collapse, and maybe some should.

It is worrisome if a bank collapses because we know how contagious this could potentially be. We also know about the disastrous effect this has on economies, which frightened us.

Stay level-headed

However, we need to stay level-headed. The fact is, all US banks in question were small to mid-sized regional banks catering for a homogenous clientele. Their collapse will most certainly bring hardship to local businesses, clients and investors alike but will not be the cause of a global banking crisis.

But what about Credit Swiss, one of the big players in the global financial system? Is this not something we should worry about? Is the Credit Swiss collapse not connected to the collapse of the US banks?

The simple, no, nor really. There is no connection because the fundamentals are different.

Credit Swiss´ problem was never a lack of liquidity or capital. Nor had they – like the US banks- put all eggs into one basket. The reason for the 167-year-old bank was its management’s hybris and self-destructive attitude to crime and risk management.

A global crisis was avoided because damage control was done on time and fast. UBS, the Swiss Central Bank and the Swiss Government acted fast and decisive. However, the bank’s shareholders will lose quite a lot of money in the process. Let’s hope they did not put all eggs into one basket.

To summarise, all collapsed banks’ only commonality is bad risk management and a total loss of investor and client confidence.

The real danger

With all the regulations in place, there is one real danger-mass hysteria. The Media, social or any other, contribute to sowing fear. And they do this with glee. Why? Because it sells! However, this can lead to a bank run, and the consequences for the global banking system would be disastrous.

History is full of bank runs, from the first bank run in 17th century Sweden, the multiple bank runs in the 19th century, and the bank run in 1930, which led to the great depression. Each time it was fear and frenzy which finally led to the collapse of a banking system.

Bank shares across the globe have been extremely volatile over the last weeks and will most likely continue to do so for some time to come until customer and investor confidence is regained.

However, let’s not overlook the interest rate problem because it is currently a real problem for the banking industry. Even if most banks rarely put all eggs into one basket, rising interest rates always have two sides. They certainly create additional income for a bank because they can charge higher rates for loans.

But the inverse relationship between bond prices and interest rates means the sharp increases in interest rates this year have lowered the value of fixed-rate bonds held as investments.

Many banks increased their holdings of bonds during the pandemic when deposits were plentiful, but loan demand and yields were weak. For many banks, these unrealized losses will stay on paper. But others may face actual losses if they have to sell securities for liquidity or other reasons. Losses on investment securities—realized or not—can affect a bank’s capital position.

Speed Read

The recent collapse of Silicon Valley and Signature Bank, followed by really worrying news from First Republic and Credit Swiss and two more US banks, sowed investor worries.

The four US banks were not linked in any form but had one commonality: They all held considerable hold-to-maturity long-term bonds.

The inverse relationship between bond prices and interest rates means the sharp increases in interest rates this year have lowered the value of fixed-rate bonds held as investments, including those of banks.

Losses on investment securities—realized or not—affects a bank’s capital position and liquidity.

Credit Swiss´collapse is not in any way connected to the collapse of the US banks. But it was a downfall in slow-motion mainly because clients and investors had lost confidence and trust in its ability to change. Credit Swiss´ repeated connections to financial-market and political scandals and its bad risk management were some of the many reasons.

Banks depend on their clients and investors’ trust. If this trust is lost – for whatever reason- and clients start withdrawing money, and investors sell their shares, the bank heads for collapse.

Yet, despite plenty of regulations, one significant danger exists to a bank’s survival-mass hysteria.

Social and the media, in general, keep sowing fear with glee. This can lead to a bank run; once one bank faces a bank run, others will follow suit due to – amongst other factors- the press sowing even more fear. A well-tried and century recipe for a global banking crisis.

Investors and clients must stay level-headed and avoid making decisions out of unfunded fears. Most importantly, they must never put all eggs into one basket – meaning never put all your money into one bank.

Sources: Manager Magazin; Economist; Wall Street Journal, Bloomberg; Investopedia; Financial Stability Board; Federal Reserve Bank of St. Louis; Reuters; BBC; CNN; AlJazeera; CNBC; Bloomberg