By Simon Gauci Borda
The last couple of weeks have been mired in a banking crisis that began in the U.S. and continued in Europe. The collapse of Silicon Valley Bank, which was the first bank to be affected, was a classic bank run. The bank, which financed Silicon Valley entrepreneurs, was the fastest bank in history to collapse given that rumours were able to spread quickly through social media and the ability of depositors to withdraw funds electronically. In the past, the rumour mill amongst bank depositors would work at a much slower pace with depositors having to physically withdraw their funds.
While the run on the bank can be traced back to the investment decisions that were taken to hold long-term bonds which declined significantly in value due to the interest rate hikes implemented by the Federal Reserve (“FED”), the bank run was triggered when Silicon Valley Bank announced that it sold investment securities held at a significant loss while also announcing that it would be raising additional capital through the issuance of new shares.
Silicon Valley Bank’s collapse was quickly followed by the collapse of Signature Bank which also catered largely to the technology sector. The announcement by one of Credit Suisse’s major shareholders that it will not providing additional capital to the bank triggered concerns surrounding the Swiss bank. Shortly after, Credit Suisse was provided a lifeline by the Swiss National Bank (“SNB”) and was soon after acquired in a relatively short period of time by its rival UBS.
While the effects of the recent events were limited, they nonetheless spooked markets as investors flocked to safe haven assets such as Government bonds and disposed of assets that are viewed to be risky such as high yield bonds and equities. These moves led to lower Government bond yields, as investors’ demand propped up prices, with the value of high yield bonds and equities experiencing a decline.
Regulators made a series of announcements and undertook certain steps to calm financial markets. In the U.S., the FED established the Bank Term Funding Program (“BTFP”) which allowed banks to tap into a source of liquidity and quell any concerns that depositors may have with U.S. banks.
In Europe, specifically Switzerland, the SNB, provided Credit Suisse with 50.0 billion Swiss Francs to boost the bank’s liquidity and calm investors. Shortly after, the SNB was able to broker a deal for UBS to acquire Credit Suisse in a deal worth $3.25 billion. However, the deal between the two Swiss banks also included the total write down of AT1 bonds.
Monetary policymakers on both sides of the Atlantic have had their say on the recent banking crisis. While the European Central Bank (“ECB”), the Bank of England (“BoE”) and the FED remain laser focused on bringing down the level of inflation within their respective economies it seems as though the FED may be the only central bank willing, or at least expected, to either pause or slowdown the pace at which it continues hiking rates. The reasons behind these expectations are due to a couple of factors, least of which includes the fact that the FED was the first central bank to hike rates and may take a more cautionary approach to further rate hikes in order to avoid a credit crunch within the U.S. financial system. Also, the recent banking crisis did not occur within the European or U.K. economies, at least for the time being, and therefore further rate hikes by the ECB and BoE remain justified given the stubbornly high levels of inflation.
While the recent banking crisis and expectations of higher rates have led to a certain level of uncertainty, financial markets have taken a respite as confidence has increased on evidence that the crisis has been contained. Some of the losses incurred during and in the aftermath of the banking crisis have been reversed over the past week as markets have turned somewhat bullish.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.