The banking crisis that began due to the setbacks of the Silicon Valley Bank (SVB) has spread to many American and European institutions. Its severity leads to a weakening of the global financial system in the context of raising interest rates imposed by central banks to contain inflation. However, should we be concerned about the health of banks? Not necessarily, because decoding the mechanisms at work makes it possible to understand them.
US regional banks weakened
In this scenario in several acts, we must return to a state SVB. The upstart bank in Silicon Valley was taking very large deposits, which in 2021 it put into 10-year Treasury notes. A priori nothing is more certain. But higher interest rates led to a mechanical drop in bond prices. When her clients demanded their money, she was forced to urgently sell her sovereign bonds. there $1.8 billion loss Note that a panic has led to withdrawals, even 42 billion dollars in one day ! However, SVB complied with prudential ratios and had no bad debts. The rapid bankruptcy of SVB (which was bought by the First Citizens) and the generated crisis of confidence caused many other victims: Silvergate, the signature, when First Republic Bank Seriously rocked. A mode that exposed the vulnerabilities of regional US banks, with the exposed liquidity and interest rate risks allowed by ultra-lax regulation.
The spread of the crisis in Europe
Chapter Two, Crisis Contagion of European Banks. It’s first Swiss credit, a comprehensive bank, borne the brunt of depositors’ distrust. An event that owes nothing to chance but which remains very different from the situation of the SVB: after a series of scandals, the venerable institution has had difficulty for several years, although it has also respected its prudent obligations. However, in the face of depositors’ distrust aggravated by clumsy comments from the boss Saudi National BankOn March 19, 2023, the Swiss authorities imposed their acquisition of UBS. Sale in 3 billion Swiss francsThis forced takeover also results in a net loss of 16 billion Swiss francs for holders of subordinated bank debt (known as AT1). friday in Deutsche Bank The financial markets are attacking. Profitable and well-capitalized, it has also suffered from various scandals in the past. The early deliverance of a “Tier 2” minor bond set things on fire. The price of credit default swaps (CDS), i.e. insurance for bankruptcy coverage, has skyrocketed. Thus, the irrational took control of the markets and shook the entire financial sector.
Quick response from moderators
Quick response, management Biden I quickly secured all Silicon Valley bank deposits to prevent the panic movement from spreading. After a confused connection, Janet YellenThe US Treasury Secretary indicated that a systemic risk exception could be mobilized on a case-by-case basis, making it possible to protect all depositors. in Europe Christine Lagardepresident European Central Bank (European Central Bank), to the solidity of European institutions and the ECB’s ability to act if necessary. With serious arguments: Banks in the eurozone are subject to stringent capital requirements and regularly pass stress tests. This strict regulation is part of the new international banking rules, known as “Basel 3”. Thus, the banks are in a much better position than they were in 2008: their balance sheets are healthy, they are still well capitalized and the interbank market is not suffering, which is evidence of their trust in each other.
Opportunity to deepen the necessary reforms
It is now up to the supervisors and central banks to calm the markets’ panic that their fears may become realised. Regulations introduced in 2010 are now proving useful. However, this episode reminds us that banks cannot survive without trust. Depositor panic, amplified by social networks, poses a formidable threat. Therefore, transparency is more necessary than ever. These events will strengthen US regulations and should also encourage concentration in the banking sector, where small institutions are most at risk. In Europe, a true banking union could finally see the light of day, promoting financial integration in the eurozone. The crisis sometimes turns into a positive factor in the medium term.
Maxime Guibet, Consulting Director at Lamarck Group, Head of ESG Offering
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