It was a matter of time before the most aggressive interest rate hikes of the last 43 years began to claim their first victims: Silicon Valley Bank (SVB) and Credit Suisse (CS). Although for different reasons, both institutions led to increased uncertainty for depositors and investors.
In the US, the failure of the SBV was dictated by internal factors, such as the complete lack of interest rate risk management, and external factors, namely the devaluation of investments in US Treasury bonds and the absence of supervision by the regulator.
After the pandemic, the development of the startups went off, as did the SVB activity. The increase in deposits, arising from funding from investors, was largely invested in US government debt with an average maturity of over five years. However, the rise in interest rates devalued investment in bonds, with consequences for the bank’s equity.
If SVB sold all of its portfolio of debt, the capital would be negative, that is, there would not be enough money to repay depositors. It was worth the quick intervention of the US authorities, which saved depositors but at the cost of all shareholders and debt holders.
On this side of the Atlantic, the postponement of the Credit Suisse accounts, the announcement of material discoveries in the control of financial reporting and the fact that Saudi investors announced that they would not put more money in the bank, were the last straw for investors.
After years and years of involvement in scandals such as currency manipulation, secret loans to Mozambique, overexposure to venture funds and problems in controlling money laundering, the time has come for depositors to feel insecure.
In the last quarter of 2022 alone, CS customers withdrew 37% of their deposits, or more than CHF 140 billion. The bleeding of deposits continues in 2023, even with the ongoing restructuring plan. It is therefore inevitable that CS will become a small local bank, sell its international operations and be restructured with the least possible impact on confidence in the financial system.
With rising interest rates, potential losses for financial institutions reach billions of euros. In the USA alone, at the end of 2022, that amount represented 675 billion dollars, that is, three Silicon Valley Banks!
A fall in the CS would have an impact on depositors’ confidence in smaller financial institutions, and would lead to a concentration of deposits in large banks, increasing the risk of the system as a whole. That is why the current situation will deserve the increased attention of regulators, as it has already had its first impact on the perspective of future interest rate hikes.
Despite the fact that the European Central Bank has increased the deposit rate by 0.5% to 3%, a peak in interest rates at 3.5% is now expected, which could trigger the decline in interest rates in early 2024. The Federal Reserve, on the other hand, after the second largest bankruptcy of an American bank, it should reduce interest rates from September 2023, as a way to combat a long-unknown feeling – distrust, the worst enemy of the economy.
The author writes according to the old spelling.
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