A look at the demise of SVB, Signature Bank and Credit Suisse and what this may mean for regulation.
After the financial crisis of 2008, it felt as though banking could never be the same again. The fragility of over-complex financial markets was exposed with catastrophic consequences. Change was essential to ensure the mistakes made in the lead up to the crash could never, ever be repeated. As a result, regulations – particularly in the US, which was at the centre of the crisis – were hastily implemented to closely monitor financial institutions, with mandatory capital requirements and stricter oversight rules.
US President Barack Obama’s administration (2009 – 2017) saw the enactment of the Dodd-Frank Act; the most significant Wall Street reform in history, designed to address the lack of oversight that allowed the financial crisis to happen and putting stricter obligations on banks with more than US$50bn in assets – banks considered “too big to fail”.
In the UK, legislation was passed that required banks to separate retail banking operations from more risky investment banking and the “Basel III” international regulatory framework created global benchmarks for banks’ capital requirements.
Fast forward to the Trump administration (2017 – 2021) and the lessons learned from 2008 were no longer so fresh. A business-focused US government went to work on unravelling many of the key regulations of the Dodd-Frank Act. This included raising the asset threshold of banks considered too big to fail from US$50bn to US$250bn.
Déjà vu
The collapse of two major US banks, Silicon Valley Bank (SVB) and Signature Bank in close succession in March 2023 brought back a flood of bad memories for many. Shortly after, a beleaguered Credit Suisse was taken over by UBS in a hastily constructed rescue deal.
So, what happened?
What happened at SVB?
SVB had been operating for 40 years and was the 16th largest bank in the US, specialising in servicing technology companies. During the Covid-19 pandemic, SVB capitalised on the growth of technology startups as the demand for tech increased due to remote working. SVB also invested heavily in the US government bonds market, which was negatively impacted by the recent hike in interest rates implemented by the Federal Reserve to try to combat rising inflation.
This all significantly impacted the value of SVB’s portfolio, which might not have been such a problem in the long-term if they were able to keep hold of their investments, however, economic conditions caused many of SVB’s clients to withdraw funds. This forced SVB to sell many of its bonds at a loss, which in turn caused investors to get anxious and eventually resulted in a run on the bank. “In a series of risk management oversights, macroeconomic factors and the good old fashioned rumour mill, SVB went through a liquidity crisis, causing a bank run on their deposits,” said Forbes.
The US branch of SVB quickly collapsed and the German and Canadian branches were closed by their local regulators. The UK arm of the bank was bought by HSBC for £1.
What happened at Signature Bank?
Signature Bank’s demise was a result of contagion in the market. Founded in 2001, it was a US-based, full-service bank headquartered in New York, with a focus on wealthy clients. Its depositors saw what happened at SVB and began rapidly withdrawing funds. Regulators feared further contagion into the wider banking sector and so stepped in and closed Signature Bank on 12th March 2023, just two days after the collapse of SVB. Due to its wealthy client base, many of the bank’s deposits were over US$250,000, which meant they were not eligible for deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC). However, FDIC was appointed receiver for the bank and later promised to protect all deposits, even those above the US$250,000 limit.
What happened at Credit Suisse?
Credit Suisse’s problems began in 2021 in the wake of the Archegos scandal. Archegos Capital Management (Archegos) was a family-run investment office owned by Bill Hwang. Archegos ran into trouble when it became over-reliant on leverage to chase higher returns in the market. Its lenders began to get nervous because Hwang was losing too much money through his leveraged investments, so they issued a margin call, which resulted in the collapse of the fund. The total losses are estimated to be around US$20bn. Credit Suisse was one of Hwang’s biggest lenders and lost US$4.7bn.
This triggered a sell-off in Credit Suisse’ shares, worsened by the resignation of the bank’s chairman, Antonio Horta-Osorio in January 2022, just eight months after he was hired. He had been accused of breaking Covid-19 rules.
In July 2022, the bank’s new CEO, Ulrich Koerner, brought fresh hope in the form of a strategic overhaul, but failed to convince investors. Rumours about a possible collapse – which were unsubstantiated, but dangerous nonetheless – began to circulate, further eroding customer confidence.
After the collapse of SVB and Signature Bank spooked the markets, things only got worse for Credit Suisse as its share price plummeted and depositors began withdrawing funds. Fellow Swiss banking giant UBS bought the bank for US$3.2bn on 19th March 2023.
Banking crisis “not over”
In a letter to shareholders at the end of Q1 this year, Jame Dimon – CEO of JPMorgan since 2005 – said: “While this is nothing like 2008, it is not clear when this current crisis will end. Even when it is behind us, there will be repercussions from it for years to come.”
Dimon also suggested regulators should be turning a more critical eye towards banks that have a high percentage of deposits that fall outside of government-backed insurance schemes. He added that the risks linked to sharp rises in interest rates were also “hiding in plain sight” and should have been part of banks’ stress testing scenarios. “This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players,” he said.
David Harden of Summit Global Investments also emphasised that the banking crisis is “not over”, despite JPMorgan reporting record results for Q1. He told Yahoo Finance Live: “[The crisis is] more rolling. If you go back to the great financial crisis, some of the other blow ups came months later. We’ve learned from the past, there are some good things on the horizon. But we’re not through it.”
Could there be another crash like 2008?
As this latest banking crisis began to unravel, mainstream and trade media were littered with headlines such as “Bank runs, bailouts, rescues: are the ghosts of 2008 rising again?”. Bank CEOs scrambled to release encouraging statements to the press, desperately trying to calm shareholders and depositors and instil confidence in the markets. Luckily – for US taxpayers at least – the storm quieted somewhat after a few tough weeks, with far fewer casualties than 2008. But it provided enough of a scare to make regulators, politicians and bankers take a long hard look at how the industry is functioning and if it can go on the way it is.
What has changed since 2008 and what’s still the same?
“Anyone who has been working in finance for 20 years or more will know that regulation is cyclical,” says Mike Finlay, CEO of RiskBusiness. “A catastrophic event, such as the 2008 crash, or the collapse of Barings Bank in 1995, is the catalyst for tighter regulation, greater oversight, higher capital requirements…But as the memory of that catastrophic event starts to fade, the banking lobbyists insist that lessons have been learned and the world is a different place…and those with influence lean on those responsible for banking regulation until it slowly begins to unravel again.”
Ironically, SVB’s CEO, Greg Becker, was one of the lobbyists who fought to get Dodd-Frank regulations revoked, claiming it was too small for such tight regulation. “SVB’s management appears to have neglected the basics of actual banking,” wrote Rebecca Burns and Julia Rock for The Guardian. “The bank had no chief risk officer for most of last year, and failed to hedge its bets on interest rates…In the meantime, the bank’s deposits ballooned from less than US$50bn in 2019 to nearly US$200bn in 2021…From the moment that Congress passed banking reforms through the 2010 Dodd-Frank law, SVB lobbied to defang the same rules that would probably have allowed regulators to spot trouble sooner. On many occasions, lawmakers and regulators from both parties bowed to the bank’s demands.”
A bank run in the digital era
The speed at which SVB’s collapse took place was accelerated by the rise of digital banking and the ability of depositors to withdraw their funds at the tap of a smartphone screen. Panicked clients attempted to withdraw US$42bn in deposits from SVB in one day. In 2008, when there was a run on Washington Mutual, depositors withdrew US$16bn over a period of 10 days. “[The SVB collapse] also happened in an era when corrosive chatter about a bank’s health can spread at the speed of a tweet,” wrote John Letzing, Digital Editor, Strategic Intelligence, at the World Economic Forum. “The panicked run on Silicon Valley Bank that depleted it of essential deposits was probably the fastest in history…As jitters continue to spread…the most important role for regulators right now might be to calm the waters. Because fear can be both contagious and self-defeating.”
The impact of social media on business and banking is pervasive and irreversible. How regulators and world leaders will address this remains to be seen.
“The fact that people can communicate so much more quickly…[has] changed the dynamic of bank runs and perhaps changed the way we have to think about liquidity risk management,” Todd Baker, from Columbia University’s Richmond Center, told Reuters.
There have been calls for regulators to monitor potential rumours on social media around the clock and provide protocol for how banks should respond. Some have also suggested banks will need to be operating 24 hours a day, seven days a week and guarantee depositors access to their cash at all times. Some have argued that social media accelerated SVB’s collapse in particular because its client base was technology centric. Had the regulators explained that Credit Suisse was in a different situation over the weekend between SVB’s collapse and Credit Suisse’s emergency takeover, perhaps the outcome may have been different. Others argue that the Swiss bank was already doomed and SVB’s demise simply cemented the inevitable. Either way, this will be an area of increased interest for regulators in the coming months and years.
The Edinburgh reforms
In the UK, the Chancellor of the Exchequer, Jeremy Hunt, recently proposed a potential rollback of City regulations implemented in the wake of the 2008 financial crisis, including ring-fencing rules designed to protect ordinary customers by separating their deposits from high-risk investment banking operations. The reforms could also prompt a discussion about the Senior Managers Regime, which currently holds senior executives of banks personally responsible for issues that happen under their supervision.
Critics of the proposed reforms say they couldn’t come at a worse time. “There is no real case for financial sector deregulation,” Dr Josh Ryan-Collins, an associate professor in economics and finance at University College London told The Guardian. “It’s a case of ferocious lobbying by certain interests in the City. And Jeremy Hunt and Rishi Sunak looking for some sort of growth post-Brexit. But it’s not going to work.”
Despite the banking crisis unravelling just after the announcement of the Edinburgh reforms, Hunt looks determined to go ahead, with a Treasury source confirming the plans would commence unchanged, according to The Daily Telegraph.
Is Regtech the answer?
“One of the weaknesses of a traditional financial regulatory system – whether in the US or Europe – is that it is over-reliant on the judgement and competence of bank regulators,” writes Gayle Markovitz for the World Economic Forum blog. “Despite digitisation, financial reporting has not changed much in decades. It is based on a system where central banks monitor and supervise the global financial industry based on reporting that is pushed out by banking firms.” Markovitz argues that Regtech, which uses software to pull data from financial firms, rather than relying on them to submit it, could allow for a “regulator-led pull-based system, where information is pulled at source, analysed and modelled in real time with future trends projected continuously, ensuring supervision of the industry remains on point at all times.”
The collapse of SVB in little more than a day has demonstrated that relying on monthly financial reporting simply won’t cut it in a digital economy. “The Basel committee will have to see how some rules need to be reapplied or how guidance should be given around frequency in particular with respect to proportionality and deregulation,” CEO of fintech firm Suade, Diana Paredes, told Markovitz. “And over the next few weeks, many financial organisations will be asked overnight for information…Regulators could have straight access to banks and do a lot of this analysis without notifying the markets or making any kind of panic around it. It would be a very interesting concept for supervision.”
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