Banking under stress: A reminder of yesteryear, not a repeat of history

After such a turbulent 2022, 2023 had been feeling a little more sedate and peaceful until financial cracks began emerging in the banking system as a consequence of central banks raising rates at their fastest pace for decades. The events that unfolded during March, saw a number of US regional bank failures and ongoing questions being asked about the broader strength of the banking system, in Europe, with a particular focus on Credit Suisse. The failure of Silicon Valley Bank (SVB) and Signature Bank show that the signs of stress are having large effects, in a limited number of areas.

There are some specific issues related to SVB, which became insolvent in March (another bank, Signature Bank, was also closed by New York State Regulators):

So, what happened at SVB?

  • SVB had grown its depositor base very quickly – quadrupling the amount of deposits over the last five years. This was coming from, in a large part, venture capital backed start-up companies who when venture capital backing became more cautious, increasingly drew down their cash deposits.
  • SVB had a large amount of uninsured deposits within its customer base, they were not a retail focussed bank, which meant the client base was therefore much more flighty. Worries about lending quality and the level of crypto deposits saw depositors seek to withdraw their cash, which in turn saw SVB need to sell down assets to pay depositors.
  • SVB, like all other banks, held assets and SVB held a large proportion of these in US Treasuries. So far, so good. The “but” comes from what type of Treasuries they held, which were long-dated maturities, those most sensitive to losing value if interest rates rose. As interest rates did rise, these bonds fell in value and as depositors sped up with withdrawal of cash, SVB needed to sell some of these Treasuries to fund those withdrawals.
  • When SVB announced it was selling $21bn of these Treasuries at a $1.8bn loss and was also seeking an equity raise of $2.25bn, depositors got even more concerned, and a bank run ensued. The attempted equity raise got pulled after SVB’s share price fell 60% and the FDIC took over the bank.


In terms of a response, the regulatory authorities have been quick to act:

US response:

  1. For all depositors in Signature & SVB, the US authorities guaranteed access to their deposits (not just those that were insured against bank failure – in the US, this is deposits <$250,0000).
  2. A new bank term funding programme was made available to all banks, allowing them to raise cash against the maturity price (not the lower market price) of high-quality assets, such as US Treasuries.
  3. Shortly after the failure of SVB, 11 major US banking giants such as JPM, Bank of America and Citigroup agreed to deposit $30bn in another struggling US regional bank, First Republic, to help not only shore it up, but also send a signal of confidence in the US banking system.

UK response: SVB UK was bought by HSBC for £1, who injected £2bn into the bank. This meant depositors also continued to have access to funds.

Enter stage right, the unwitting Credit Suisse…

Credit Suisse has been taken over by its Swiss rival, UBS, in a regulator-backed transaction borne out of the experiences learned during the financial crisis, from which regulators learned:

  • To act fast
  • To go big

Credit Suisse is/was a much bigger fish than SVB; a major European bank judged to be of sufficient size to be considered a global, systemically important bank. It has, however, had a difficult ride in recent years within its investment banking, wealth management and asset management divisions and seen its market cap decline significantly. Had it not been for SVB, Credit Suisse could realistically be talking about its turnaround strategy, having recently raised equity capital from investors, in the expectation that ‘the market’ would be giving it the benefit of the doubt. Instead, bank runs in the US, delays to its financial reporting and an “absolutely not” comment from one of its equity backers that it wouldn’t support with more equity investment (the bit about that being for regulatory reasons, rather than investment reasons being bypassed by headline writers), left Credit Suisse looking like the soft underbelly of a European banking sector at a point of financial stress.

In terms of what has happened:

  • Equity investors in Credit Suisse have had 22.48 shares exchanged for 1 UBS share, equivalent to just CHF 0.76 per share. No shareholder approval was required.
  • UBS have CHF25 billion of downside protection, notably including a lower tier of Credit Suisse bonds (called AT1’s) that have been written down to zero; CHF 9 billion in loss protection (after the first CHF 5bn in losses), as well as a “very significant” liquidity support provided by the Swiss National Bank.
  • Central banks have coordinated to extend international liquidity for US dollars.

What now?

The regulatory actions have been pretty decisive in both the US and Europe. In the US, if further banks hit similar troubles, they too are likely to have particular niche characteristics and now have a defined pathway to go down. Lessons from the global financial crisis point to governments and regulators increasing the level of support until the market hawks see that as an insurmountable fact. The actions around Credit Suisse will be testing the water if that is now the case. In the near term, the answer is ‘yes’, in the longer term, the jury is still out.

The banking sector is a vastly different sector than it was in 2008. Regulators have far more tools to deal with situations like this and the recent actions show matters like this can be dealt with in swift order. In 2008, a large part of the problem was opacity and limited knowledge on how to value a host of bank’s more esoteric assets, as well as needing time to develop the tools to solve the problem. That isn’t the case today.

But spillovers can and do occur. These events will damage confidence and build uncertainty for at least the short term. This builds on the uncertainty that was already swirling about the continued level of interest rate rises being pushed on to the economic environment. It wouldn’t be surprising to see banks tighten their bank lending standards in the interim, which will stifle the flow of credit and pull back demand, increasing the risk of a recession it looked like potentially being avoided. Depositors too may take the opportunity to diversify their cash deposits over a broader number of institutions (potentially triggering more outflows out of some of the US smaller banks).

The events also put front and centre in the minds of central bankers, that there are now twin aims when considering interest rate rises. Inflation remains key, but so too does a watchful eye on the health of the financial system and the stress interest rate rises are creating.

These events should not be trivialised, but they also should not be seen as a systemic risk to the banking sector, as it was in the global financial crisis. Think of this as being the confluence of two rivers; on the one hand, some lesser regulated US regional banks, with particular characteristics and susceptibilities, met the long-term managed decline of a major European bank. In these turbulent waters, all parties were subsumed.

Download PDF.

You are now leaving the HFMC Group of Companies websites
Skip to content