The recent collapse of the two banks SVB and Credit Suisse has brought back the memories of 2008. The ghosts of the past have come back to haunt us but with a difference. We now have the ghost busters !
Let’s start by briefly explaining what went horribly wrong for these two banks.
SVB was the preferred banker for start up high tech companies. They were not alone as many venture capitalists were with them at SVB.
The pandemic in 2020 was a hot market for tech companies as consumers spent big money on digital services and electronics. Tech companies had a large influx of cash, and SVB’s services were needed during this time to hold their cash for business expenses, such as payroll. The bank invested much of these deposits as banks typically do.
But it’s what they invested in that was the problem. SVB invested a large amount of bank deposits in fixed rate US long term government bonds. They had not diversified their portfolio.
When the Federal Reserve hiked interest rates in 2022 to combat inflation, SVB’s bond portfolio started to drop. As all ACCA AFM students will know, a rise in the risk free rate means fixed rate bond yields rise & prices fall.
When you had assets worth at one time $209 billion and that evaporates, so does confidence. Bye bye bank.
A totally different story.
Their failings were multiple
1. A criminal conviction for allowing drug dealers to launder money in Bulgaria,
2. Entanglement in a Mozambique corruption case.
3. A spying scandal involving a former employee and an executive and a massive leak of client data to the media.
4. Its willingness to engage with clients that some other banks avoided, such as disgraced financier Lex Greensill and failed New York-based investment firm Archegos Capital Management.
Many fed up customers voted with their feet, leading to unprecedented client outflows in late 2022. The loss of business was especially dramatic in Asian wealth management, which for many years had been an important source of profit growth.
The final nail in their coffin was when the chairman of its largest shareholder, Saudi National Bank, ruled out investing any more in the company. Bye bye bank.
Who Are The Ghost Busters?
Well, back in 2008 when Lehman Brothers collapsed the US and UK governments were caught on the back foot. Barclays Bank offered to buy up part of Lehman’s, but the UK bank regulator effectively kiboshed that option.
But, the story in 2023 is totally different. The governments acted far more quickly.
As far as SVB are concerned:
1. The US Treasury Department designated SVB failure due to systemic risks, giving it authority to unwind the institution in a way that it said “fully protects all depositors.” The FDIC’s deposit insurance fund will be used to cover depositors, many of whom were uninsured due to the $250,000 cap on guaranteed deposits.
2. The UK government & Bank of England secured the sale of the UK arm of SVB to HSBC at a fire sale price.
What’s good for one failed bank is good for another.
The Swiss government acted fast and persuaded UBS to buy its rival for half its market value. It paid a sweet $3.25 billion.
So will the ghosts of 2008 come to haunt the financial markets. Nope, simply call the ghost busters !