The speed of the demise of US bank SVB and then Credit Suisse in Europe has spooked bank investors and customers who are wondering if there are undisclosed financial weaknesses at their banks. So, what is going on and what happens next?
Are we in a banking crisis?
Opinions diverge on this question.
The California-based Silicon Valley Bank is the biggest US bank collapse since 2008, and Credit Suisse has joined financial crisis peers such as Bear Stearns that were sold at fire-sale prices.
AMP chief economist Shane Oliver says that while the bank failures do not look like a rerun of the financial crisis, they do represent contagion risks.
Investors have been selling down regional US banks, in particular, over concerns they might have balance sheets that resemble SVB’s finances.
But other parts of the market, including US tech stocks, have held up well during a volatile few weeks, indicating some investors expect the threat of a banking crisis to subside.
It is clear, however, that the speed of the demise of SVB, and then Credit Suisse, has spooked bank investors and customers.
The swift share price movements, and ability of customers to quickly pull their deposits, has been attributed in part to social media and its ability to disseminate information quickly.
It took just 48 hours between the time SVB disclosed that it had sold its bond portfolio at a loss and its collapse.
In the case of Credit Suisse, it received an emergency loan from Switzerland’s central bank last week, which initially soothed the market. By the weekend, it needed to be saved.
How are central banks trying to avert a meltdown?
Several central banks have announced a strategy to keep money flowing through the global economy to help ward off the sort of credit crunch that gripped markets during the financial crisis.
The initiative, led by the US Federal Reserve, will enable other central banks to more easily obtain US dollars that can be distributed to commercial banks in their countries.
This is designed to ultimately flow through to borrowers, who need access to credit for mortgages, businesses and investments.
The mechanism to do this is called a swap line, which are agreements between two central banks to exchange currencies. Until at least the end of April, the Federal Reserve will offer daily currency swaps – rather than weekly – to ensure central banks in Canada, Britain, Japan, Switzerland and the euro zone have adequate US dollars to operate.
The changes are designed to help avoid a credit crunch; a situation whereby the global banking system tightens up and it becomes much harder for consumers and businesses to get a loan.
Australia’s central bank is not included in the initiative. It has indicated that the country’s banking sector is robust despite the problems emerging in the US and Europe.
Photograph: Brittany Hosea-Small/Reuters
Why are deposits important?
The current unease in the financial system was sparked by the collapse of SVB, which suffered a bank run after it disclosed a hole in its finances caused by the sale of its inflation-hit bond portfolio.
Customers quickly pulled their deposits, and without adequate cash on hand, America’s 16th largest bank collapsed on 10 March.
Banks typically use deposits to underpin loans to other customers and to invest, making them critical to operations.
While the US government stepped in to guarantee all deposits of SVB customers, global banks are preparing for customers to pull back.
Saxo Capital Markets said in a note that some global banks are rushing to shore up liquidity by borrowing US dollars amid concerns deposits will dwindle.
What happened to Credit Suisse?
Switzerland’s largest bank, UBS, will purchase the country’s second largest, Credit Suisse, in a deal supported by the government that also avoids a major bank collapse that could have triggered wider fallout.
The below-market purchase for almost US$3.25bn includes an insurance scheme from Swiss agencies to backstop potential losses that UBS faces from taking on some of Credit Suisse’s riskier assets.
It comes after years of scandals at Credit Suisse eroded its reputation and profitability, before a sharp loss of confidence among investors last week threatened its viability.
European Central Bank president Christine Lagarde welcomed the Swiss government-backed deal which she said would aid the region. “They are instrumental for restoring orderly market conditions and ensuring financial stability,” she said.
At one level, SVB and Credit Suisse have little in common given the differences in their size, assets, clients and even location.
But they share a link in that customers and investors lost confidence in both banks, causing a liquidity problem. “The connecting factor is sentiment,” says professor Paul Kofman, business and economics faculty dean at the University of Melbourne.
He says this differs from the shared exposure to investments like sub-prime mortgages that connected banks during the global financial crisis.
“Credit Suisse is not nearly as heavily invested in tech stocks like SVB, but from an investor’s perspective, there was a weakness in the balance sheet which is the point of connection.”
