Banks – the essentials you need to know

There has been an increased focus on the banking sector in the last month, with the collapse of Silicon Valley Bank and only a last minute, government-brokered deal saving Credit Suisse from experiencing the same outcome.

News headlines on banks have been as full of references to panic and turmoil in financial markets as at any point since the 2007-08 financial crisis, but we believe the current situation is not that alike and there currently appears to be far less risk of a banking system-wide crisis than just 15 years ago.

The downfall of Silicon Valley Bank (SVB) was essentially down to mismanaging interest rate risk – sharply rising interest rates caused the bank’s clients (in many cases start-up technology companies) to withdraw deposits while at the same time reducing the value of its assets, a good proportion of which were government bonds whose value tumbled as interest rate increased. As reports of trouble at SVB gained momentum, a bank run began, and the vicious circle was set in motion with depositors rushing to withdraw funds. US regional banks play a key role in commercial real estate lending and the recent issues in the sector, coupled with the expected increase in regulation, will likely mean higher costs of capital going forward, which, if it occurs, could well have knock-on effects to the real estate sector.

Credit Suisse’s problems can be traced further back, as shown by the 99% decline from the 2007 high in its share price to the level at which UBS, a rival Swiss lender, bought the business. In a clear sign of increasing trouble, the Sfr0.76 (Swiss francs) per share deal, paid for with UBS stock, was around 60% lower than Credit Suisse shares closed on the final trading deal before the deal was agreed. Recent scandals involving Grensill Capital and Archegos were the last of a long line of crises faced by Credit Suisse. Last year the bank reported a US$7.9bn loss, effectively wiping out a decade’s worth of earnings. In contrast many banks posted sizable profits for 2022, with UBS, for instance, declaring earnings of US$7.6bn.

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Banks: the essentials you need to know

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