The latest banking failures expose ‘growing frictions’ in the financial system

Credit Suisse became the latest lender to run into trouble this week, adding to fears that another banking-sector-driven global financial crisis is looming.

This has raised questions about how long this period of uncertainty would last, although regulators and the banking sector have acted quickly to allay these concerns and prevent another damaging meltdown from sweeping the world.

A potential credit crunch could materialize as “rapid monetary tightening could disrupt funding markets and increase pressure on banks as asset-liability mismatches widen,” analysts at German financial services firm Allianz wrote.

“The failure of the SVB is certainly a harbinger of growing tensions in the financial system,” it said, referring to Silicon Valley Bank, which has spotlighted the current crisis in the industry.

Three of the four banks that went bust over the past week were from the US, and all have heavy exposure to the technology sector, particularly startups and cryptocurrencies.

From 2001 to 2023, there were 563 bank failures in the US, with 414 between 2008 and 2011 alone, and 157 peaking in 2010, according to the latest data from the US Federal Deposit Insurance Corporation.

The troubles were highlighted by last week’s sudden collapse of Silicon Valley Bank, a California-based lender that primarily catered to tech and startup customers.

Silvergate Capital: an FTX victim

However, before SVB failed, Silvergate Capital, a New York-based lender with strong ties to the cryptocurrency sector, announced on March 8 that it would be ceasing operations amid a meltdown in the market.

The bank was seen as another victim of the collapse of FTX, one of the world’s largest cryptocurrency exchanges, which went bankrupt in November. In its fourth-quarter earnings report, Silvergate said it lost about $1 billion after its customers withdrew $8.1 billion. Around 90 percent of the assets were tied up in the technology sector.

The bank is considered one of the most crypto-friendly banks in the US, along with Signature Bank, and its demise has created uncertainty as to who crypto companies would turn to for cash.

“These were the two most Bitcoin-friendly banks, supporting the lion’s share of fiat settlement for Bitcoin trades between trading partners in the US,” wrote Mike Brock, chief executive of TBD at crypto platform Block, in a post on Nostr.

Silicon Valley Bank: the trigger

US regulators seized the SVB and placed it under receivership on March 10 to protect its investors after a bank run. After the 2008 collapse of Washington Mutual, which in turn triggered the global financial crisis, it became the second largest banking collapse in US history.

The fallout from SVB’s demise was swift: it rattled global stock markets, which lost some $465 billion in value, and sparked growing concerns of another financial crisis.

The FDIC had created a bridge bank that now manages the deposits and assets of SVB’s former clients, most of whom have deposits up to millions of dollars above the FDIC-insured $250,000 threshold.

As word spread that the bank might be insolvent – with government bonds it had been buying over the past few years plummeting in value following recent rate hikes – many of these firms withdrew their money from the SVB.

“The bank run was the last nail in the coffin and many SVB customers were unable to transfer their funds before the bank went bankrupt and payouts were suspended,” wrote analysts at blockchain platform Chainalysis.

First Republic Bank: fate is yet to come

First Republic Bank, a San Francisco-based mid-market lender, had a volatile trading week, seeing wild swings in its stock price following the collapse of SVB, Signature Bank and Silvergate Capital.

Eleven major US banks came to their rescue, announcing $30 billion in deposits to prop up the ailing financial institution. These banks included JP Morgan, Bank of America, Citigroup and Wells Fargo, each contributing $5 billion in uninsured deposits.

The action reflects that the US banking system has “strong credit, ample liquidity, strong capital and strong profitability. Recent events have not changed that,” the banks said in a statement.

It remains unclear how much this cash injection will change First Republic’s fortunes.

US Treasury Secretary Janet Yellen also tried to allay fears by telling the Senate Treasury Committee that the US banking system “remains sound and Americans can have confidence that their deposits will be there when they need them.”

Signature bank: “SVB-generated panic”

Signature Bank, the New York-based lender that is on par with Silvergate in terms of significant cryptocurrency ties, became the third-biggest failure in US banking. It was placed into receivership by the FDIC, which also guaranteed its customers’ deposits.

As with Silvergate, Signature was caught up in the crypto market downturn, and its collapse was the result of “SVB-generated panic,” as described by Wall Street Journal, with depositors withdrawing more than $10 billion in a single day. Regulators said its failure posed a systematic risk to the US financial system.

After the failure of these US banks, lenders are likely to become even more conservative in lending, Allianz analysts said.

“In the short term, financing conditions in the US economy are likely to tighten further [and other countries] As banks raise lending standards and carefully secure their liquidity positions, they continue to cut lending,” they said.

Credit Suisse: Can UBS make this work?

Credit Suisse, which is considered one of the world’s systemically important banks, threw even more fuel on the fire after its main shareholder announced that it would not make any further investments.

Shares of the Zurich-based institution fell but rallied on Thursday after Switzerland’s central bank announced it would throw a $54 billion lifeline to the lender — the first such move by a central bank since the 2008 crisis.

Swiss lender UBS is in talks to buy Credit Suisse financial times reported on Friday, citing sources familiar with the situation.

A full merger of the two banks would create one of the largest financial institutions in Europe. UBS has around $1.1 trillion in assets, while Credit Suisse has around $575 billion.

Updated Mar 18, 2023 8:03 am