The stability of the US banking system is being questioned after two of the three largest bank failures in American history over the weekend and the continuously plummeting shares of the mega Swiss bank, Credit Suisse.
The collapse of Silicon Valley Bank and Signature Bank has raised questions about how the banking system is regulated and how it’s supervised. While federal authorities have intervened to manage the crises and protect depositors, financial experts of bank clients are questioning the long-term impact of such interventions on the financial system, including potential risks associated with increased government funding and the emboldening of banks and companies to take more risk.
Credit Suisse crisis
Credit Suisse, the 167-year-old bank and the second-largest lender in Switzerland, is in deep trouble. A string of scandals over many years, top management changes, multi-billion dollar losses and an uninspiring strategy all led to a slump in its shares and bonds, intensifying fears about a global banking crisis.
The lender accepted a financial support of up to 50 billion Swiss Francs ($53.7 billion) from the Swiss National Bank in a bid to reassure investors and strengthen its liquidity. The bank called the loan a “decisive action to pre-emptively strengthen its liquidity.”
“This additional liquidity would support Credit Suisse’s core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs,” the bank said in a statement.
In addition to the loan, Credit Suisse has also repurchased billions of dollars of its own debt to manage its liabilities and interest payment expenses.
With assets of about $573 billion, Credit Suisse’s problems present a much bigger potential headache, as it is much more globally interconnected, with multiple subsidiaries outside Switzerland. The sharp drop in Credit Suisse’s shares caused a spill-over effect on other European banks, with French, German, Italian, and UK banks also falling. The ECB has asked banks to investigate their exposures to Credit Suisse.
Acknowledging “material weakness” in its financial reporting and scrapped bonuses for top executives, Credit Suisse has announced to urgently develop a “remediation plan” to strengthen its controls.
Investors, already anxious of the the failure of Silicon Valley Bank over the weekend, sold Credit Suisse shares earlier in the day, resulting in a further decline in the stock price.
SVB failure
Silicon Valley Bank (SVB) and Signature Bank failed with enormous speed after a large number of depositors withdrew their funds from the banks simultaneously. SVB collapsed on Friday, marking it the largest failure of a US financial institution since the 2008 financial crisis. The bank, which served mainly technology workers and venture capital-backed companies, failed after depositors rushed to withdraw money amid anxiety over its health.
The bank’s collapse is expected to be an “extinction-level event” for startups, according to Garry Tan, CEO of startup incubator Y Combinator.
Nearly half of the US technology and healthcare companies that went public in 2022 after receiving early funding from venture capital firms were Silicon Valley Bank customers.
Signature Bank failure
Two days after the Federal Deposit Insurance Corporation (FDIC) took control of Silicon Valley Bank, New York regulators abruptly closed Signature Bank on Sunday to stymie risk in the broader financial system. Signature Bank, which provided lending services for law firms and real estate companies, had deposits of less than $100 billion across 40 branches in the country. The bank’s clients included some people associated with the Trump Organization, Mr. Trump’s company. Like Silicon Valley Bank’s clients, most of Signature bank’s customers had more than $250,000 in their accounts at the time of closure.
Banking system is secure, assures Fed
The federal government assured Americans that the banking system was secure and regulators guaranteed all deposits at the two banks, creating a program that protected other banks from a run on deposits.
President Joe Biden reassured the public that their deposits would be safe and that the banking executives responsible for the failures would be held accountable. Additionally, the Federal Reserve will reassess its supervision of SVB.
“We need to have humility and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience,” said Michael Barr, the Fed’s vice chair for supervision, who will lead the effort.
Mega US banks rescuing First Republic Bank
First Republic, which held deposits worth $176.4 billion as of December 31, seems to be encountering comparable problems. The San Francisco-based bank serves a similar clientele as Silicon Valley Bank, which failed last week, and New York’s Signature Bank, which was shuttered on Sunday.
Eleven of the largest US banks have announced a $30 billion rescue package for First Republic Bank to prevent it from becoming the third bank to fail in less than a week, and to head off a broader banking crisis.
“We are deploying our financial strength and liquidity into the larger system, where it is needed the most,” the banks said.
The rescue package is seen as a vote of confidence in First Republic, whose banking franchise before the past week was the envy of the industry, catering to wealthy clients including billionaires.
“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system,” Treasury Secretary Janet Yellen, Acting Comptroller of the Currency Michael Hsu, Federal Reserve Chair Jerome Powell and FDIC Chairman Martin Gruenberg said in a joint statement.
What does the collapse mean for consumers and investors?
The collapse of Silicon Valley Bank, one of the largest US bank failures in history, and the takeover of cryptocurrency-focused Signature Bank has raised concerns among consumers and investors about the stability of the US banking system. However, the financial advisers have advised consumers and investors not to panic.
The Federal Reserve is creating a Bank Term Funding Program to secure institutions affected by the instability sparked by the SVB failure, and regulators have approved plans to safeguard depositors and financial institutions.
According to Lee Baker, a certified financial planner, the Federal Deposit Insurance Corporation provides standard coverage of $250,000 per depositor, per bank, for each account ownership category. This includes single or joint account holders, and individuals can divide their funds among ownership categories and banks to prevent exceeding the limits.
Impact on financial system
Financial advisors warn investors about diversification issues, but they believe the bank failures are not a repeat of the 2008 financial crisis.
“We’re not about to head down the road of 40% broad market decline,” Baker said, adding that there’s no reason to make “major portfolio moves and panic at the absolute wrong time.”