“Too Big to Fail” is pushed to the foreground again, as the latest banking debacle has market participants on edge as the financial contagion spreads across the globe.
What started the latest banking crises?
It all started with Silicon Valley Bank (SVB) earlier this month, which has now been branded as tech’s own “Lehman Brothers moment” by Goldman Sachs’s Cliff Marriott. SVB, the 16th largest US Bank, was a significant role player and a vital funding source for tech startups and venture capital firms. The collapse of SVB started when the bank revealed they sold their fixed income portfolio, valued at $21 billion, at a loss of $1.8 billion and announced they needed to raise $2.25 billion to meet withdrawal needs and fund new lending.
This sparked a downgrade by Moody’s and venture capital funds and other clients to withdraw billions from the bank, which spilt over to the rest of the world. The share price plummeted 60%, and SVB bonds posted record declines after announcing the news. HSBC bought the UK arm of SVB for $1.21, and the deal protected roughly £6.37 billion in deposits at the bank. The Federal Deposit Insurance Corporation (FDIC) has decided to insure and safeguard all SVB’s depositors and funds from fearing contagion to the broader economy. The US Federal Reserve (Fed) clarified that the US taxpayers would take on none of the losses. The credit crunch has even prompted the Fed to contemplate a pause in hiking interest rates but sited that inflation remains policymakers’ top concern and increased rates by 25 basis points.
Which Banks were Affected?
As fears of another financial crisis started spreading fast, the ripple effect spread to the global banking industry. Major Eurobanks moved lower from the news, and the US KBW Nasdaq Bank Index, which tracks 24 banking stocks, was down by 7.7%.
Three banks firmly placed into the spotlight besides SVB and Signature Bank were the Zürich based investment bank Credit Suisse Group AG, US commercial banking company First Republic Bank and now Deutsche Bank AG.
As the US banking crises unfolded, Credit Suisse had headwinds to deal with the release of its annual report, which showed the bank had found “material weakness” in its financial reporting in 2021 and 2022. The financial contagion intensified, which has seen Credit Suisse loan $54 billion from the Swiss National Bank and a takeover bid by rival UBS in an emergency rescue deal. The bailout by the Swiss regulator will be passed on to the taxpayer, which amounts to roughly 109 billion Swiss Francs.
Things went south for Credit Suisse, and the US commercial bank and provider of wealth management services, First Republic Bank, has also seen its fair share of troubles. Like SVB, First Republic Bank also saw extensive outflows and credit downgrades from the rating agencies.
First Republic Bank can’t seem to win over investor sentiment right now as the bank has made numerous attempts to stop the bleeding, but the share price continues lower. Not even a $30 billion injection by the banking sectors could reassure investors. As the bank stands on the brink of collapse, it has been working closely with JPMorgan Chase and Co to raise capital for the ailing bank as the credit crunch saga continues.
The German multinational bank Deutsche Bank AG is the latest bank in Europe to come into focus just days after the Credit Suisse rescue. The German multinational bank’s shares tumbled today after Deutsche’s credit default swaps shot to a four-year high, highlighting concerns among investors about the overall stability of European banks. The share price lost more than 13%, bringing it to a new five-month-low point, while the broader banking Index, the Stoxx 600 banks index, fell over 5%.
As the Deutsche Bank’s story unfolds, market participants look to central bank policies to see if there will be a broader contagion.
What is Financial Contagion?
Financial contagion is the latest buzzword around the globe, and nothing new as some of the first examples can be traced back to the 1990s with the Asian financial market’s crises. Financial contagion refers to the spread of economic crises from one region or market to another. The contagion can affect multiple sectors and industries connected by monetary and financial systems.
Summary
Although there are some signs that the banking industry is stabilising somewhat, it is far too early to tell if the globe has averted another global financial crisis. The global banking industry will become topical, and any macroeconomic data points could have an effect if the contagion can not be contained.
Sources: Silicon Valley Bank, CNBC, HSBC, Credit Suisse Group AG, Bram Berkowitz, CNN Business, Bloomberg, Reuters, Financial Times.
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