The 2023 Banking Crises Explained

In 2023 banking crises hit the banking world with the falls of Silicon Valley Bank (SVB) and Credit Suisse. These events showed how much we need strong financial practices. They made clear the big impact of bank failures on the sector’s trust and stability.

This article will look at what we can learn from these crises. It will focus on the need for good risk management, following rules, and clear reporting. By examining these banking issues, we want to find out how to avoid such problems in the future. Let’s explore how to keep our financial institutions safe and trusted.

Key Takeways

• Manage Risks: SVB and Credit Suisse collapses show the importance of identifying risks early.
• Follow Regulations: Swift regulatory responses highlight the need to adhere to regulations for stability.
• Transparency Matters: Clear reporting builds trust and credibility with stakeholders.
• Know Client Risks: Recognizing and managing client-related risks is crucial.
• Continuous Improvement: Crises prompt the industry to reinforce best practices and accountability.

Background of Silicon Valley Bank

• With the loosening of the Dodd – Frank act in 2018 Silicon Valley Bank moved outside the sphere of oversight by the Financial Stability Oversight Council. The intention of this council was to monitor the financial stability of major financial institutions. With the limit to be a major financial institution increased from $50 billion worth of assets to $250 billion SVB was no longer classified as a major financial institution.
• SVB enjoyed a huge surge in deposits, primarily from startups, from 2019 to 2022. SVB decided to invest most of these deposits in U.S. government bonds. As the FED started increasing interest rates, the values of these bonds were significantly reduced. 
• At the same time many SVB customers started withdrawing funds which resulted in SVB having to sell these bonds to cover withdrawal needs. As many SVB customers were companies, they held significantly more than the FDIC insured $250 000 dollars in the bank. SVB reported a loss of $1.8 billion resulting in significantly reduced confidence. Users on X (Twitter at the time) started discussing the issues of SVB which led to significant attention being placed on the story

Background of Credit Suisse

• Credit Suisse was a longstanding institution with deep ties to European banking. Founded in 1866, Credit Suisse grew to become one of the largest banks in the world by the 2000’s. In November 2021 Credit Suisse was included in the list of G-SIBS banks.
• Credit Suisse however had been marred in scandal for a long time and had consistently reduced income from 2014 to its failure in 2023. Credit Suisse was accused of and in some cases convicted of aiding in money laundering, working with human rights violators, sanction busting and spying on former executives. As a result of these scandals and poor financial performance, Credit Suisse had a slew of short-lived CEO appointments in the 2020’s culminating with the appointment of Ulrich Körner in the summer of 2022
• Körner announced a sweeping restructuring program to return Credit Suisse to profitability. This program was expensive, being forecasted to cost CHF 4 – 6 billion. With high risks and low investor confidence, Credit Suisse was in deep trouble going into 2023.

Timeline of Events Leading to the Fall of Silicon Valley Bank

• 8.3.2023
  • SVB reports $1.8 billion dollars of losses from selling treasury bonds and plans to issue $2.25 billion worth of equity. Moody’s decreases SVB’s rating.
• 9.3.2023
  • The markets seemed to sense a banking crisis with SVB stock falling by about 60% during the day. Many other banks were also hit during the day, however not as strongly as SVB. As venture capital funds recommended their clients to withdraw from SVB sooner rather than later, SVB was hit with $42 billion worth of withdrawal requests.
• 10.3.2023
  • Amidst panic on the stock exchange trading on SVB stock was halted. Federal regulators announced that they would be taking over the bank and President Biden announced that all deposits in SVB would be protected, even the funds that exceeded the FDIC limit.
• 12.3.2023
  • All funds held in SVB were made available to customers.
• 17.3.2023
  • SVB Financial Group files for bankruptcy.
• 26.3.2023
  • First Citizens bank announces that it will be buying all of SVBs assets except those held by the FDIC.

Timeline of Events Leading to the Fall of Credit Suisse

• 9.2.2023
  • Credit Suisse publishes its results for fiscal year 2022, indicating a net loss of almost CHF 7.3 billion and 138 billion worth of customer withdrawals in the fourth quarter of 2022. Credit Suisse’s share value falls by around 50%.
• 9.3.2023
  • Credit Suisse is forced to delay the publication of its annual report after a call from the SEC. Share value falls by 24%.
• 15.3.2023
  • The chair of Saudi National Bank, Credit Suisse’s largest shareholder, ruled out further investment, which resulted in deposits flowing out and the share price collapsing.
• 16.3.2023
  • Credit Suisse announces that it will be exercising an option to loan CHF 50 billion from the Swiss Central Bank
• 19.3.2023
  • Credit Suisse and UBS announce a merger, with stockholders of Credit Suisse receiving shares of UBS as compensation. Swiss regulators announced up to CHF 100 billion of added liquidity to Credit Suisse.
• Post March
  • The handling of the Credit Suisse situation has been criticized, especially from a moral hazard perspective. AT1 bondholders were wiped out while shareholders got stock in UBS. UBS has also announced significant layoffs from the former Credit Suisse.

Similarities and differences of Aspects Leading To The 2023 Banking Crises

What Was The Solution to the Silicon Valley Banking crisis?

First, the department of financial protection and innovation of the state of California took over SVB. The deposits were transferred to a FDIC operated bridge bank because regulators were unable to find a buyer for SVB. The insured deposits (up to $250 000) were promised to be available to depositors by March 13. However, on March 12 The FED announced that all depositors would be made whole.

The decision was made to avoid contagion so that the failure of SVB’s wouldn’t have major impact on the whole economy. The regulators feared that the collapse would weaken the trust in the banking system, potentially causing more instability and bank runs. The deposits were insured fully by the FDIC, not directly by the taxpayers. The losses for the FDIC’s Deposit insurance fund amounted up to $20 billion. Fear of civil unrest if taxpayers were once again made to pay for a bank’s failure?

On March 26 the First Citizens Bank and FDIC struck a deal. FCB bought SVB’s deposits and loans; purchase of about $72 billion SVB assets at a discount of $16.5 billion. $90 billion in securities and other assets were to remain in the receivership for disposition by the FDIC.

As a response to the failure of SVB and Signature Bank, the FED set up the Bank Term Funding Program (BTFP) to provide liquidity to U.S. depository institutions. The goal is that banks won’t have to sell securities like US treasuries and bonds at a discount when faced with sudden a need for liquidity. The plan is only temporary and will last till March 11, 2024. In short, the BTFP offers loans of up to one year in length to banks and other eligible depository institutions that pledge U.S. Treasuries or other qualifying assets as collateral.

Solution to the Credit Suisse Crisis

On March 16, The Swiss National Bank announced that it would give Credit Suisse $54 billion in emergency funding. However, despite the positive news, the failure of SVB and Signature bank decreased the trust in the banking system, and lead to further loss of confidence in Credit Suisse: stock price plummeting and depositors withdrawing their deposits. On March 19, UBS, Switzerland’s largest bank, announced that it would buy Credit Suisse for $3,2 billion in an all-stock deal. The deal had lots of government influence:

The deal was orchestrated by the Swiss National Bank, which provided UBS over $100 billion in liquidity in support of the deal. Furthermore, the deal was brokered by the Swiss Financial Market Supervisory Authority and the Swiss government. Shocking to Credit Suisse’s debt holders, over $17 billion worth of AT1 bonds were written to zero. The decision was authorized by the Swiss regulators with the aim of making private investors bear more of the suffering.

All in all, the Swiss authorities reversed the hierarchy between AT1 holders and shareholders. The equity holders received one UBS share for every 22.48 Credit Suisse shares held, while junior debt holders completely lost their investments. Consequently, investors now believe that AT1 bonds will become more expensive for other all other Swiss banks because investors will consider these bonds riskier than before.

After the merger, UBS assets are valued at approximately $1.7 trillion. This is equal to about twice the Swiss GDP and UBS is now the only globally significant Swiss bank remaining, possibly making it “too big to save”. In the case of UBS failing, the Swiss financial sector and the Swiss economy would be in serious trouble.

What Can We Learn From The 2023 Banking Crises

The problems at Silicon Valley Bank (SVB) and Credit Suisse teach important lessons. Both banks faced troubles due to poor financial decisions, issues with rules, and risks from their customers. SVB’s fall showed the importance of managing risks well and making wise investments.

The troubles at Credit Suisse highlighted how crucial good management and following regulations are. Quick actions were taken to make depositors feel safe again and reduce risks to the system.

Banks must now focus on being clear with their operations, managing risks better, and sticking to rules to keep depositor’s money safe.